Assetsure News 11th August 2008

Credit Crunch Update

The credit crunch has continued to bring bad news for the UK Property market.

Property prices are now 12% down compared to this time last year, according to announcements by the Halifax today. This has meant that the average home in the United Kingdom has reduced by £20,000 in the last year. There appears to be no light at the end of the tunnel for struggling homeowners with interest rates remaining unchanged at 5% (which has been ignored by mortgage lenders who continue to lend on a limited basis at 7%-8%. The Bank of England appears powerless to prevent the impact of global inflation hitting struggling UK homeowners and consumers. The high price of oil and the huge demand for commodities from of China India another growing economies, is continuing to give the Treasury and policy makers a big headache. Just two years from a general election, the Government (who dictate economic targets to the Monetary Policy Committee), will struggle to control inflation at the preferred 2.5%. The MPC may find it difficult to reduce interest rates to help struggling homeowners while trying to deal with overseas linked inflationary pressures.

There appears to be no change in the attitude of banks and mortgage lenders towards risk. Huge profits from a decade of excessive lending, have now turned to losses on equally huge scales. They are now even scared to lend to each other, let alone the general public. This is not surprising with announcement after of announcement of write downs and profit warnings from major financial institutions. For instance, the Royal Bank of Scotland announced a £1.2 billion write-down linked to subprime mortgage debt from the credit crisis fallout. UK residential new mortgage approvals are 80% down compared to this time last year. In addition, the number of new builds is 33% down, as property developers such as Barratt and Wimpey are laying off thousands of workers.

From an investment point of view the buy to let mortgage also appears to be dead. Speculation has dried up and thousands of would be landlords face negative equity. However, it's not all bad new for landlords... a continued rising population from economic migration and divorced living alone, means a rising demand for rental property (forcing rents up). Cash strapped students and working families are now facing the double whammy of rising household for food and energy bills, increased home insurance premiums, plus the an increased rental charge from struggling landlords. Bizarrely, rental values have climbed over the last 12 months, as huge volumes of first time buyers have ran (or been forced out) of the first time buyers market, choosing to sit on their hands and rent instead. Mortgage lenders have imposed always impossible borrowing criteria on the first time buyers such as raising the deposit amounts to 30%, adding additional'administration fees' and charging higher interest rates.

It appears the recent hints of a possible announcement by the chancellor, that certain first-time buyers and other lower income groups may become exempt from stamp duty has done little to excite anybody. Indeed, an own goal may have been achieved as those same groups are now well aware that it may be worthwhile to hang on and wait / not to proceed with any possible initial purchases, in order to save some money on stamp duty.

Between 2002 and 2006 commercial property prices had almost doubled. However, the impact of the credit crunch means that today, the commercial property market is in turmoil with orders for new builds down 38%. There has been nine per cent fall in the capital value of retail warehouses. Central London has seen the largest number of falls in the volume of private-sector office sales and rentals. For the first time in 50 months, the number of transactions has fallen. Another indication of the commercial property market worries is that Friends Provident have recently suspended individuals rights to withdraw money from it's £1.2 billion pounds commercial property fund, due to continued withdrawals from worried investors, particular from overseas. The headline days of the £1bn canary wharf office block development is long and truly gone. Instead bank, institutions and lenders are concentrating on diversification and conserving cash (as opposed to spending it on luxury new blocks of flats developments and Corporate Headquarters). Savills have recently surveyed developers of commercial property and established that one thirds anticipate some form of major economic decline or recession. In addition, plans for regional major shopping centres have also been put on hold as the UK's largest developers face similar funding problems.