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House Prices Aren’t Impacting P2P Lending
Falls in house prices in seven of the past 10 months (according to both Halifax and Nationwide) have not perceptibly impacted overall annualised lending results at P2P lending platforms.
While price changes can have delayed effects, the future also looks very healthy for lenders using property P2P lending accounts.
That's even though the price falls coincide with much higher interest rates coming along for existing homeowners.
Price falls being absorbed in buffers
Most property P2P lending is development lending.
P2P development lending providers are finding that sales prices are sometimes dipping into the cover that they have built into their projections for build-and-sale timelines.
But the price changes are a long way off causing severe delays or, especially, losses that might noticeably dent lenders' returns. There's no perceptible lasting impact of the falls and a lot of headroom remaining to cover the loans and interest.
P2P lending with price falls in real time
Despite all the data 4thWay gets from P2P lending companies, we don't usually see what prices borrowers ultimately sell their properties for.
We see the amount repaid to lenders and the interest paid to them, as that is the actual cash impact on lenders. Naturally 4thWay gets a huge amount of other important data, too, but usually it's focused on lending, not property owning.
So it's not easiest to see price falls when looking at development lending data and interrogating those lending platforms.
Instead, we need to look at P2P lending accounts where property-price changes are constantly measured, because those changes affect your rewards and not just your risks.
Currently just one P2P lending company closely fits the bill on this, which is Assetz Exchange*, so it's all we've got to go on.
Luckily, it provides 4thWay with very detailed data, so we can see the direct impacts of property-price changes on lenders in real time.
It's monthly data shows details of each loan and property, alongside local house-price index changes, as well as the amount of money gained or lost by lenders who have sold their loan parts to other lenders. Plus, the data shows the estimated paper gains or losses on unsold loans.
(A paper gain or loss is when some sort of revaluation suggests that the value of an asset you own has changed, even though you haven't sold the asset to confirm its actual price.)
With Assetz Exchange's lending structure, the gains and losses from selling loan parts, as well as the paper gains or losses, are directly linked to property prices…
How Assetz Exchange loans are intertwined with house prices
Assetz Exchange, for the uninitiated, sets up an independent company for each loan. Every company is isolated from bankruptcy to prevent contagion if a loan turns bad.
Each of these companies buys a property on behalf of charities and local authorities to house people using the supported-living service.
You are the lenders who fund the property purchases, and your returns are tied to the rents paid by the charities and authorities.
Due to the structure of the loans, you also take part in gains or losses from property-price changes.
So it's kind of like a lending and property-owning hybrid, in terms of the risks and rewards for you. Like an owner, you get to experience the joys of seeing property prices fluctuate, impacting your wealth on a monthly basis – at least on paper.
As you funded the property purchase in full, you're fully exposed to the property prices in a way that money lenders usually aren't. So I think it's a pretty good barometer of the behind-the-scenes exposure to rising or falling house prices in P2P lending.
Let's take a look at each of the ways Assetz Exchange shows the impact of house-price changes, so we can see the level of exposure and assess its impact.
The House Price Index and P2P lending
Firstly, there's the change in property values versus the House Price Index.
Although Assetz Exchange started in just 2019, the average price change has still been +11%, based on local data within the index.
Only six properties, all of which were recently funded, are sitting on single-digit, negative valuations based on the House Price Index. Of those, just three haven't yet paid out enough interest to lenders to cover that dip in valuation.
Based on this measure, lenders who had unfortunately lent in those six loans only are nevertheless still sitting on positive overall returns.
Property prices based on sold loan parts
Then there's the actual prices from sales of loan parts on Assetz Exchange's secondary market between lenders.
Lenders right now are typically discounting the price of their loan parts, at least partially based on recent property prices. Indeed, 27 out of the 59 completed Assetz Exchange loans are currently selling at a discount.
But not all that much: those selling for less than they started are down just 3.5%.
Interest already paid out to lenders on those loans only very slightly outweighs that price dip. Yet that's only because many of the newer loans need a bit more time to mature.
Just a small number of lenders have decided to sell five of the loans for an overall loss.
Few lenders would want to sell these loan parts so soon after the loan started, so most lenders holding are on. Lenders are chiefly interested in buying and holding loan parts from Assetz Exchange, not selling, to keep earning around 6% until there's a good time to sell out.
An important way other property P2P lending differs from Assetz Exchange
While long holding periods don't apply across the board in property P2P lending, lenders instead earn higher rates elsewhere to offset the additional risk of lending for shorter periods.
I haven't tried to specifically calculate what average uplift in rates is needed in shorter-term lending, as our focus is usually on assessing individual P2P lending company's risk-reward balance, not the aggregated balance.
However, based on current short-term property lending results, our forecasts for each of those P2P lending providers, and the typical buffers they have against delays and price falls, the uplift in interest is clearly, easily sufficient to compensate for the shorter-term risks.
Typically, those loans are paying a premium over Assetz Exchange of two percentage points or more, which I assess as ample reward for potential additional bad debts.
Price changes of unsold loan parts at current secondary market rates
As lenders hold Assetz Exchange loans for the long term, few loan parts are up for sale.
But, if all loan parts were to be sold today at the same price as those few sales, lenders' losses based on property prices would actually outweigh all the gains from loan sales since Assetz Exchange started by about £200,000.
However, total interest paid out so far is just approaching £2 million, even in this short history of a little over £20 million in lending.
This shows that, in the end, money lending even of this kind still comes down largely to interest paid and not trying to make money buying and selling your investments. The movement of property prices as a whole really is less relevant than you would think.
Monitoring the impact of property prices
The impact of recent price changes on P2P lending has not been very significant.
For now, the health of the property-lending platforms still look extremely good, with overall a large margin of safety remaining against severe events like major price falls and recessions, provided you are willing to lend for a sensible amount of time and you spread your money across lots of loans.
Lower property prices – and also higher borrowing rates – might still nudge overall lender returns downwards in the next year or two, so 4thWay will keep monitoring that intensely for you at individual platforms, through our regular assessments, interviews and data forensics.