You know there's a property crash coming when...

**wendigo100** · 19 February 2006, 12:28

You know there's a property crash coming when...

...Tony Blair buys into the market!

**vetran** · 19 February 2006, 12:42

overleveraged?

Whatever happened to overextended?

**IR35 Avoider** · 19 February 2006, 14:34

Alvin's American (I think.) In any case, I think over-leveraged is better. It's more specific.

**bogeyman** · 19 February 2006, 15:27

Originally posted by IR35 Avoider

Alvin's American (I think.) In any case, I think over-leveraged is better. It's more specific.

What about just good old-fashioned "insolvent" (i.e. assets < liabilities).

"Over-leveraged" indeed!

**IR35 Avoider** · 19 February 2006, 18:25

Insolvent and over-leveraged are not the same thing. As far as I know Millard is not insolvent, her property assets are worth more than the sum total of her debts. She's just taking far more risk than she understands, and is risking falling off the edge of the cliff at any moment.

If I am worth £0 and manage to borrow £1 million to invest in property then (assuming no transaction costs) my net worth is still £0. I am not insolvent, but I am over-leveraged. If property falls 1% my net worth then becomes minus £10K. If the loan terms do not allow the loan to be called in early and I can generate enough income from the property to meet the interest payments, and the downturn is only temporary, I don't have a problem. On the other hand, if (as is much more likely) the loan can be called in at the discretion of the lender or when it is not covered by the assets, then I am up a creek...

Whenever you borrow to invest you take a risk that you will be wiped out during a temporary down-turn in the market. This is one of the reasons why almost everyone with an account with a derivatives broker or spread-betting company ends up losing money. (Trading in derivatives is often equivalent to investing with borrowed money.) Even if people have a strategy that will win in the long term, volatility ensures that they get wiped out during a temporary down-turn after which they are out of the game; the long-term never arrives. That is why leverage is dangerous.

I get the impression that people investing in property think they are doing well if they only borrow 75% of the value of the property. Speaking for myself, I recently shifted my ISA savings into funds that own commercial property, and am extremely uncomfortable that one of them is allowed to borrow as much as 50% of the portfolio value. One third or less is the norm for the rest. Ideally I would prefer to invest in funds that don't borrow at all, as I believe that borrowing always worsens the risk/reward ratio. (Most investors only look at rewards, which is why fund managers can get away with using gearing.)

**vetran** · 19 February 2006, 19:26

Overextended

Overleverage suggests you have a lever that is too large, however overextended suggests the line of credit you have been extended is larger than sensible.

These Americans they can't talk the Queens English. Fleety jump in any time.

**Fleetwood** · 20 February 2006, 07:40

These septics and the "English" they use really do piss me off.
Their inability to pronounce "aluminium" properly does my head in.

**milanbenes** · 20 February 2006, 07:42

how are you doing Fleet ?

what's new ?

Milan.

**Fleetwood** · 20 February 2006, 07:50

Back in Brussels for 6 monther, perhaps 9
Rate and contract OK, not brilliant, but after four months on the bench, you can't be too choosy....

You know there's a property crash coming when...