Ten years later and things are different
This is a poignant month for us as we ‘acknowledge’, a ten year anniversary. More on that shortly. To explain the background, we set up our property operation just as the market was recovering from the 1989 property crash - a good time to do so.
Between 1989 and 1993 values fell by 20%, caused by high interest rates of 12% to 14% between 1989 and 1991. Around 250,000 homes were repossessed during a four year period as home owners failed to meet their mortgage commitments. Our clients who entered the market at that time benefited from the recovery and we were all happy until those fateful days in 2008 when the Global Financial Crisis hit.
This is the10th anniversary of the credit crunch that affected all the banks. It was certainly a harrowing time for everyone as panic set in, values plunged 18% over 16 months and banks called in loans.
It was a case of mitigating the damage as best we could or closing the shop and heading off into the sunset. Some people appreciated we did the former, others complained we should have seen the crisis coming and taken appropriate steps beforehand. Such is life.
These days I smile when I see a young, glib agent barely out of school talk about the never-ending rise of the property market. The GFC taught me to be very cautious, minimise risk, have no debt and that ‘security of capital with an attractive rental return’ is vitally important.
Several investors I have met recently are concerned that Brexit may lead to a similar property crash. Whilst this is understandable, the good news is that the circumstances today are very different to those in1989 and 2008.
Banks are now required to have adequate cash reserves so that there would be enough liquidity even in a crisis. Interest rates are historically low and lenders now have to check that borrowers can accommodate a 3% rise in interest rates and that after their outgoings they have sufficient funds to repay the loan.
The consensus is that even if Sterling crashed and inflation rose quickly the Bank of England would not raise interest rates to 3.75% from the current 0.75% in one go. If it was genuinely concerned, it would already be ordering lenders to stress test borrowers at a much higher rate than it is already.
Additionally, the rises in prices before the two crashes were higher than today. In the ten years to the end of 1989 prices rose by over 200% in nominal terms and over 55% once adjusted for inflation and by over 200% and 132% for the ten years to 2008.
This is quite different from today as prices over the past ten years have risen by 23% and are 5.6% above where they once were when adjusted for inflation.
Most analysts agree that the property market will continue to move along at its own pace, with prices rising in some areas such as the north of the country and stagnating or even falling slightly in the south east, including London. Importantly, rents will still be collected, prices will be higher in ten years time and investors who approach the market properly will be happy with their investment.