Stormy waters for the UK housing market
The Credit Crunch is a now familiar term which originated from the problems created by the collapse of the American sub prime lending market in the Autumn of 2007. What appeared to be contained within the American economy quickly spread to Europe when it became clear that a large number of banks outside America had major exposure to the sub prime market.
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The UK’s problems started with the emergence of the problems with Northern Rock who had been on an aggressive expansion plan in the UK mortgage market. This expansion was done without having internal mechanisms for coping if there was ever a downturn in the housing market or liquidity problems within the money markets. Their chosen path lead to them having to seek emergency funding from the Bank of England which led to a massive lack of confidence amongst their savers. This started a domino effect which has led to Northern Rock effectively becoming a nationalised organisation with UK tax payers effectively guaranteeing their debts. This was the first of a number of UK banks which have had problems arising from the sub prime and liquidity problems. Irresponsible lending has certainly been a major factor of the current problems, loans of 130% of value or up to 8 times joint salary will inevitably lead to problems as soon as there is a downturn in the market.
From a consumer point of view this has now started to hit home with the cost of borrowing increasing despite recent interest rate cuts and the lack of available credit. Where there were over 15,000 mortgage products available in the UK last summer there are now less than 5,000. This problem is going to get worse as we are not fully aware of the write offs that many banks will have to do, this will no doubt lead to even less available credit within the market.
This has now led to a dramatic slowdown in transactions and mortgage approvals which has lead to a substantial fall of 25-30% in average house prices. The end result of the current problems can not be fully appreciated or predicted at this time because there is without doubt so much information that isn’t yet in the public domain.
On the Housebuilding side the smaller developers are regularly reporting situations where offers of funding have been withdrawn even after an exchange of contracts has taken place, this of course causes major problems for the borrowers involved and may well lead to a complete lack of confidence in the traditional banking system.
What can be done to ride out the storm?
Now is a time for cautiousness, there are still plenty of opportunities for developers who have placed themselves sensibly in the market. Mainly this will take the form of not over-gearing at this time and ensuring they do not take unwarranted risks. If a developer buys right, builds the right product with the right specification there are still buyers in the market to attract. However there has been a tangible shift in power between the seller and the buyer and the seller needs to be aware of this when pricing their finished product.
There is now more choice and this must be taken into account by the developer in respect of the finish and perhaps more importantly at present, the price.
To protect themselves developers need to be ensuring any buyer has the necessary finance in place before any firm commitments are made. In the current uncertain market there is a big difference between agreeing to buy and actually buying.
Why the current problems can actually be good news
These are turbulent and uncertain times, however some of these issues can be turned to a developers advantage if they have the right tools available. A developer is a buyer as well as a seller and they should be able to use the precarious state of the market to their advantage when negotiating to a buy a site. If they have the right finance in place and can demonstrate this to a vendor they should be able to secure a reasonable discount from the asking price, especially if this is based on historic sales prices.
This is why it is essential for a developer to have as part of their team a finance partner who has funds available and isn’t reliant on borrowing from the money markets which can lead to a restriction in the level of borrowing being offered to developers.
If a developer has this in place now can actually be a good time to buy and take advantage of the current uncertain market.
Regentsmead’s place in the current uncertain market
Unlike many other lenders we have not stopped lending or increased our costs. We are very much open for business and are still on an active expansion drive.
All of our funds are from internal resources only, we do not borrow from any lender and do not have any external shareholders. This has always been an important factor in our success when lending to the development market but in the last six months and looking ahead this is no longer just important it is absolutely vital. We are seeing more cases where developers are being let down either before they have completed their purchase or worse still when they are half way through a development.
We are being inundated with cases where other lenders have caused developers problems and we are being asked to step in and assist. We are of course being cautious in our approach but we are not making blanket policy decisions based on fear and uncertainty, we are continuing to judge each application on its individual merits and we have no problem lending on the right project.
We were not part of the irresponsible lending practices which have been going on for many years, we have as a 75 year established business always taken what we feel is a sensible, long-term view of the market. We do not take policy decisions which lead to prosperity in a rising market but doesn’t take into account potential problems when the inevitable economic downturns occur.
We are a vital partner for developers at this time more than ever and with our help developers can ride out the storm and come out safely on the other side. What is happening now is long overdue and where there has been irresponsible lending or over-commitment to financial areas banks actually knew little about, there will inevitably be consequences which many of the major banks are only now just starting to realise.
The months and years ahead are actually a time of great opportunity and with the right assistance developers will be able to grow with less competition and set themselves up well for future expansion.
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Current conditions are actually a big opportunity for landlords who are solvent. If they can put down cash, they can pick up quite a bit of property dirt cheap.
ReplyDeleteIt's only those landlords who have over-leveraged who are in trouble.