Carl,
I don’t think you are leading anyone up the garden path (or precisely, to financial ruin) intentionally, but your advice is doing people a great disservice.
Your point about “nobody knowing what is going happen” is one of the worst and most dangerous of this entire BTL bubble: By saying that you are excusing yourself and others of doing their homework. Risk is not a constant thing. There are unlikely scenarios and there are likely scenarios. This lady has not done her homework (and neither have you) on the macro economic outlook for house prices in this country. If she (or you) had, she would have realised that by far the most likely scenario is a huge and protracted bear market in UK real estate. I mean, just to get to fair value from here, the average house price needs to fall by 43% relative to earnings from the 2007 high, but it is more likely to overshoot - meaning a fall of about 60% relative to earnings. Now, what that means in nominal terms depends on how long it takes to fall and how much earnings rise in the meantime. But the most optimistic measure of this would still give you 35% peak to trough. Even the government believes that the best scenario for this year alone is a fall of 5-10% in nominal prices. On top of that every single driver of property prices over the last few years (know what they are?) have not only stopped, but are going the opposite direction in a dramatic way.
Investment has always been, is and always will be, the evaluation of risk against potential reward. To ignore the risk side of the equation is not an option for long term investment success – in any asset class. But by simply writing off far-and-away the most likely outcome for real estate by saying that no one knows the future, this is exactly what you are doing, and worse, it is what you are encouraging this lady to do.
You talk about people protecting their assets. I don’t think you truly understand leverage: This lady doesn’t really have any assets: she is leveraged 10 times! And this is at very best – the notional market value is very different form the real price she could achieve by selling (but even that is a lot higher than it will be in say 6 months time).
You talk about your experience. But you have not experienced bear markets outside of periods of high inflation. Your experience can only tell you that property prices go up in the long term – but that is wrong, because they only do so as a result of inflation (as does the price of everything). We are now in a completely different situation, with relatively low inflation and house price which are some 3 ½ times further from fair value than they were in 1989.
You talk about lifestyle choices – do you think bankruptcy is what this lady would choose?
One of the things that neither of us has mentioned is margin calls. You may or may not be aware of this, but most BTL mortgage contracts stipulate that initial LTV’s need to be maintained. This means that if your initial LTV was 90% and the value of the property falls 10%, you have to pay down the mortgage by 9% of the original value if the bank asks you to. If you don’t, the bank can invoke immediate default and repossess the property. If this happens to this lady, she will be bankrupt.
Look, the point I am trying to make to her is that she needs to face up to her situation and thereby take control. Your solution is essentially to sit back and let events take their course. That path almost certainly ends in financial disaster. You congratulated leveraging herself up like that by telling her it was good to take action. My view (which isn’t 100% certain, but is as close to as you get in investing) is that what she did was a monumental mistake, and one on which she needs to act now. I have given her the best advice I can.