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Feel free to forward but do take note that I am not offering any investment advice nor am qualified to impart this advice. I write on the basis of the fact that I’ve built a career around understanding consumers and analyzing global markets.

Property prices set for "major correction"

I read with great concern the predictions of leading fund manager John Paulson in the FT today. Quick background on the guy. Paulson, the world’s leading alpha fund manager, made $3.7 billion last year by successfully "shorting" the mortgage market failure back in 2006 - ie he bet on a mortgage market collapse when everyone else was surfing the wave of optimism.

Simultaneously I read with interest the number of posts on another well known investor forum blaming naysayers for "talking us into recession". The irony is that if Paulson’s doing the talking and making nearly $4 bn annually and an increasing number of shortsighted and overoptimistic landlords are being repossessed, whose advice would you rather follow?

So one can assume Paulson knows his stuff when it comes to understanding the mechanics of money markets. His latest predictions focus on the UK market - in which he "anticipated a major correction once longer term interest rates move higher". We have already seen a mid term upward movement in the LIBOR signalling the market is indication the liquidity problems we are currently facing are in fact worsening.

Of major concern is Paulson’s thoughts on the structure of the mortgage markets. "90 percent of the mortgage market", he writes " is supported by two private companies losing vast sums of money operating with no equity". Names such as Freddie Mac, Fannie Mae, AMBAC and MBIA may not seem household names for BMVers but these are level 0 in the non-standard liquidity market house of cards.

Goldman Sachs shorted a bunch of developers today with news that earnings would be down 90 percent. Interestingly, there are rumours "on the street" that a major development porfolio is to be liquidated shortly. I’ve just advised my mum not to go ahead and purchase a newbuild on the basis the roof was still missing and yet to complete. Of course there are legal guarantees but no one wants to have their hopes set on one property only for the developer to freeze the project or go under.

Combine this with "expert" predictions that retail gas prices are to rise 40 percent by Christmas we have, perhaps for the first time in 20 years reason to be concerned about the economic fundamentals.

Now whether you think the housing market will remain robust remains irrelevant now because when you have both the world’s leading fund manager and leading investment bank saying it’s heading south, the money follows. Bradford and Bingley’s incoming CEO certainly isn’t going to let Mortgage Express go native and start injecting more capital into the property market.

So what does this mean? It means that the mortgage liquidity problem has yet to really set in. Compound this with a serious upward pressure on fuel and food prices you will see a major squeeze on the residential property market in the next 6 months, with the pain starting to be felt in September.

What does this mean for you?

* Media coverage
Look out for newpapers scaremongering "property market crash" as finally some of the london market froth clears.

* Rent and payment defaults to increase
Expect rental demand and yields to remain high but defaults also to increase signifiying a greater than ever need to hedge against letting to workers most exposed to the credit crisis.

* HMO utility bills increase
HMOs may seem a good option in the current market, but your tenants certainly won’t be open to the prospect of significant rent increases as your utility bills add another £1000 a year to your outgoings.

* Mortgage
Charges, ERCs and terms are getting tighter by the day. I am currently very cautious of borrowing through a vehicle on the basis of a later "drawdown" as opposed to a remortgage. Such drawdowns can be withdrawn leaving you with money dead in the deal. Similarly now we’ve moved from back-to-back deals to longer refinancing windows we should also consider that our exit route is no longer certain - these can be pulled at any time.

* Best time to be friends with investors
Expect some real property bargains to manifest post Summer when the natural annual optimism turns to the task ahead. 3 beds with two receptions on at 145k last November are now presenting decent HMO or student let’s at offers around 100k. You’ll need to exercise what Robert KIyosaki calls "the ultimate skill" of the entrepreneur - the ability to raise finance. And I’m not talking about filling out a form for MX here but networking and presenting a proposal that speaks in their terms - "yield", "exit strategies" rather than "BMV".

In summary

The next 12 months will see a watershed in the property market separating the entrepreneurial investor from the amateur. The trillions of dollars "lost" in the market didn’t disappear, the simply changed hands.

The point is, as we keep being told, this is a time of opportunity but if you stick to the same old methods, lenders and keep telling everyone not to "talk us into recession" you’ll end up like the ex-owner of the portfolio of 12 properties I visited the other day - overgeared and overstretched heading towards repossession.

Landlords are exiting the market with many either returning to their day jobs or putting speculative activity on hold. Needless to say, less investors means less people to share the profits with.

Paulson noted the "decline is accelerating". Simply waiting for things to get worse before changing your strategy gives you little scope for making a difference. Paulson’s words are highly respected because he has trust with investors, now is the time we have to get out there and court those with liquid assets.