What happens to a bank where more than 15% of all its mortgages have gone into nnegative equityIn other words, the outstanding mortgage loans exceed the current value of the properties securing them, thereby creating a huge hole in their balance sheets. The answer may be taboo, but it is also logical: these banks need urgent external assistance to stay afloat.
This is the situation facing organisations such as the group Lloyds and HBOS, although I fear there would be many more than those reported if property valuations were updated rigorously and realistically. Worst of all, this situation will get much worse, as property prices will continue to fall sharply. It cannot be otherwise. The growing number of repossessions won’t be swept under the carpet because the banks urgently need to turn them into cash. They will therefore come onto the market, thereby multiplying the supply of property. And when that happens, prices can only go in one direction. I recommend you re-read this article from last November entitled «Investing During a Recession and Depression», because it is just as relevant as it was on the first day, even though four months have passed.
Despite this evidence (if indeed we can consider any future economic outcome to be evident), there are many property owners who are not under financial pressure and who refuse to sell, thereby avoiding future capital losses. And the official reason they give for not wanting to sell their properties is the current rental income they receive, as almost everyone now agrees that capital gains on property are too far off in the future to influence that decision. If we calculate the return obtained from rental income using the current market value that we would achieve through a sale today, in many cases the returns exceed 8%. On paper, we would say that these are more than sound property investments and that it would not be easy to find financial alternatives safe to achieve those figures. But be careful: we must bear in mind all the risks involved. 
As we said in «Doctor, I own some property – is that a problem?»: In the current economic downturn, the likelihood of a property standing vacant or of facing rent arrears increases significantly. We will need to tread very carefully to ensure we can rest easy in the medium term with the tenant occupying our properties and paying their rent on time. Their business and/or household finances are also likely to be affected by the crisis, making it difficult for them to continue as a tenant, or at least as a solvent tenant. We must also be aware that the supply of properties to let will increase: investors buying properties so-called bargains properties put up for rent to generate income (a risky practice in a falling market unless the properties are of the very highest quality), second and third homes whose owners need to let them out and which until now had been kept for their own use, property developments that were repurposed during construction due to the foreseeable difficulty in selling them, individuals less burdened by debt who are entering the rental market in the hope that sale prices will once again reach the value at which they have mentally anchored themselves, as well as those entering the rental market following initial bank repossession proceedings.
Of course, the sale price will also fall. And in the future, we will still be able to carry out some profitability calculations, combining the head-in-the-sand attitude and a vision rooted in the Disneyland where we’re coming from, if our tenant continues to pay us rent at current levels, whilst prices fall by a further 30%. Some may well achieve double-digit returns with remarkable ease. But let’s not kid ourselves: this situation will be temporary and unstable, and will seek to rebalance itself through a fall in rents, as we cannot envisage property prices rising whilst the recession is still with us. It is a phenomenon comparable to what has happened with bank dividends (SAN.MC) in relation to their share price. This is somewhat unstable, circumstantial and temporary, although in the case of the banks, the aim is to prolong this imbalance in a desperate attempt to regain the confidence of shareholders.
Even so, some investors continue to buy shares based on past dividends, just as others seek property investments based on rents that are also on the wane. But they should not forget that the market tends to rebalancing and that Darwin will be the judge the survival of their assets without favouring them over others with different asset investment criteria. In the short to medium term, when that rebalancing occurs, those property assets will have declined almost as much as certain financial investments or business assets in times of crisis. We strongly recommend planning your strategy and wealth progression (in its three usual forms: financial, property and business) for the medium and long term. These are very difficult times for those who fail to do so.