Over the years there have been numerous occasions when the banking community has been accused of overextending finance to the property sector. Even though traditional affordability indicators were most certainly overextended, on many occasions the banks continued to roll out finance to property investors. In theory the banks could argue that their capital, and loan repayments, were to a certain degree protected by the asset value and income stream, this is not quite true.
Pushing prices beyond fair value
A recent report confirmed that the average UK property is now valued at 6.1 times average household income. This is just a fraction below the 6.5 figure seen just prior to the 2008 worldwide economic collapse and there are growing concerns about the state of the UK property market. While the banks obviously take a call on the assets when releasing funds what if the assets themselves are overvalued?
The has been talk for many years now that the UK property market is overvalued but still investors continue to chase prices higher. Even though deposit requirements have increased over the last few years there are signs that some banks are starting to go a little “softer” on this. Are they chasing the final wave of investment money into the UK property market?
Cheap finance can’t last forever
There is no doubt that the banks are making hay while the sun shines in other words lending as much money as possible while UK base rates remain at record lows. This flood of cheap finance together with minimal returns on savings accounts has pushed many people towards the property market. If you shop around there is still potential to lock in double-digit rental yields as well as long-term capital appreciation. Against this background can you really blame investors for discounting savings accounts and looking elsewhere?
Last year there were indications that the Bank of England may well be forced to increase UK base rates although these fears have since subdued and indeed some people believe they will fall further before they rise. Against this backdrop the US Federal Reserve increased US base rates earlier this year and there are concerns of further increases to come – perhaps as soon as June/July. In reality the increase in US base rates had little impact upon a buoyant property market and perhaps further interest rate rises are warranted by the US authorities.
On one hand we have the UK economy stalling ahead of the EU referendum and the array of uncertainty this has created. On the other hand we have cheap finance supporting the UK property market as well as overseas investors looking for so-called “safe havens”. It will be a very tricky task for the UK authorities to keep a lid on the UK property market while also attempting to encourage economic growth in the short to medium term.
If, as many experts fear, the banks are willing to soften their previous hardball approach to mortgage applications then we could see further growth in UK property prices for some time to come. However, what will happen to the UK property market, investors and bank mortgage books as and when UK base rates finally return to traditional levels?