While there is continuous talk of downward pressure on UK property prices it is easy to forget that year-on-year price movements are still positive. London is perhaps the only area of the UK which is encountering significant downward pressure but this is a market which has grown rapidly in recent times. This then begs the question, have investors learned lessons from the last housing market collapse?
US sub-prime market collapse
It is easy to forget that less than a decade ago worldwide property markets were flying high and house prices continued to go up and up. It seemed that house prices would continue the upward spiral forever and a day and for many people property became their future pension fund. Then came the US sub-prime market collapse, greed over sense, fear over reality and quite quickly things went from bad to worse. Contagion saw worldwide money markets come under pressure, governments struggling to stem the tide and those investors who had overstretched themselves literally selling up at any price.
The key to the collapse in the US sub-prime market was quite literally the fact that mortgages were agreed for customers who had no chance of ever paying them back in full. Investors and advisers were literally banking on the property market going up and up to cover any shortfall and ensure that “nobody lost out”. Sub-prime market portfolios were put together and sold as bonds to Wall Street with the income attracting investors. Slowly but surely reality struck home and when one US sub-prime company wobbled the rest fell and, as we know, the rest is history.
As property prices round the world went into freefall it soon became apparent that not only were there issues in the US sub-prime market but also the more traditional mortgage market. Negative equity appeared all round the globe, households struggled to cover their financial liabilities and those who had overstretched themselves in the buy to let market saw their portfolios falling like dominoes. So, have investors learned lessons from this troubled time for the housing market?
Investors have short memories
Many parts of the UK and the US are no longer accessible to (sensible) first-time buyers because of the affordability factor. Indeed statistics suggest that fewer people than ever are climbing up the property ladder for fear of being left with large mortgages and houses which could fall in value. It would appear that lessons have been learned by some people but there is evidence to suggest that some mortgages could see the financial well-being of individuals and couples stretched to the limit when interest rates eventually rise.
There is a useful tip in the buy to let market, when calculating the financial viability of a housing purchase you should double the mortgage rate at the time and see if it is still viable. This may be stretching things a little far but it does show how much financial headroom an individual property actually offers to a buyer.
Some investors learn, some….don’t
There are some investors who literally lost their shirts in the last housing market collapse and for many of these the scars are still very raw. Others, who may not have experienced the 2007/8 collapse directly, have been taking advantage of historically low interest rates which have kept mortgage rates at extremely attractive levels.
Are they thinking about the future and whether they can afford interest payments as and when base rates rise? Are new investors banking on an increase in UK property prices in the longer term to bail them out? There is also evidence to suggest that regulations are being “interpreted” to the advantage of struggling customers who may have problems with mortgage payments further down the line. We all know that wage inflation is also struggling to keep up with the retail price index which has increased the cost of living at a faster rate than household incomes. Are too many people thinking too short term?