At this moment in time even the most sensible of investors are struggling to obtain finance for many property projects around the world. It is sometimes easy to forget that these are investors who have slowly but surely built up their assets, never over-extended themselves on the financial front yet somehow they are paying the price for historic risky lending by banks around the world. Is this fair?
There is no doubt that financial institutions around the world have pulled back from the commercial real estate market and indeed even those lucky enough to obtain finance will have to put down a significant deposit. This is quite simply because banks around the world are now paying the price for risky lending in the boom times which has rocked the foundations of their balance sheets.
Should banks not pay the price?
On the surface you may be forgiven for assuming that banks and all financial institutions lending to the real estate market should pay the price of losses in years gone by. It seems fairly sensible to assume that because they took on these “risky transactions” it is unfair to go back to more sensible investors and increase their charges for making finance available. However, it is perhaps not as clear cut as some would have you believe.
Quote from PropertyForum.com : “Over the last few years there has been constant concern about first-time property buyers with the worldwide recession, banks unwilling to enter even the most remotely risky investment and property prices moving out of the reach of many first-time buyers.”
The simple fact is that we have seen peaks and troughs in the worldwide real estate market for many years and human emotion continues to dominate investment markets around the world. Nobody, although some will have you believe otherwise, could ever have predicted the near perfect storm which created the US mortgage crisis, rocked the foundations of the euro and led to massive budget deficits around the world.
Property markets recovering
Slowly but surely we are seeing recovery in the worldwide property market, the likes of London are back towards their 2008 highs while others are perhaps recovering at a much slower rate. This is allowing many financial institutions around the world to drip feed properties they obtained by default back into the marketplace although in the short to medium term this may well depress prices. It is only when the backlog of unwanted assets are taken out by savvy investors that we will see a significant and a strengthening recovery in property asset prices.
Interestingly, while many markets around the world are struggling to maintain any serious momentum the Bank of England this week announced plans to reduce the level of cheap finance made available to UK banks. This was part of a scheme introduced by the Bank of England to increase lending to small businesses and the property sector although Mark Carney, the new governor of the Bank of England, highlighted the fact this could lead to a short-term house price bubble. Thankfully, the authorities have acted sooner rather than later in the UK and we should hopefully avoid any significant fall in the UK property market.
There is no doubt that sensible, savvy investors are paying the price for high-risk transactions entered into by banks in years gone by. An array of banks around the world have been left with assets they acquired by default which will hold back any serious recovery in numerous real estate markets around the globe. At some point we will see lending levels and lending charges return to more reasonable levels but at this moment in time banking balance sheet across the globe have been decimated and it will take a number of years to see a “return to normality”.
Are savvy investors paying the price? We will let you decide……………….