*Here's a thought for Easter relevant to God and mammon: does Hector Sants, chief executive of the Financial Services Authority, believe that Jesus was right to throw the moneylenders out of the Temple?*
As a banker and a committed Christian, Mr Sants may be in two minds on that one but he was certainly not ambivalent about the financial roller coaster of recent months when he told an audience that "I don't think markets are ever going to return to normal, where they were".
And to think he was speaking even before the most recent upheaval that has claimed one of the most respected banking institutions in the US.
However, at a time when most analysts believe things will get worse – perhaps a lot worse – before they get better, these words are more than a crumb of comfort. Presuming we get out of this mess, albeit not without more casualties, a fundamental change to the market where it all started – mortgage-lending - could present more in the way of opportunities than difficulties, not just for financial institutions and developers, but for society as a whole.
For historical reasons, most people in the UK end up eventually becoming home-owners, whether or not they wish or can afford to. They are encouraged to get a foot on that first rung of the property ladder and once on it, are supposed from then on have a vested interest in seeing house prices rise. Yet soaring prices invariably widen the gaps between the lower, middle and upper sectors of the market, making trading up to bigger and better properties less, not more, affordable. Therefore, it could be no bad thing if a squeeze on credit dampens the type of inflation which in recent years has characterised housing in prime locations within Edinburgh, Glasgow, and Aberdeen, where competition for a limited supply of stock between investors and conventional owner-occupiers has seen some properties achieve as much as 50 per cent over the "upset" price.
At present, people presume that because their house was valued at £X 12 months ago, it will now be worth £X plus 10 per cent, or whatever the average annual price increase has been for their particular locality. But annual compounded increases in values are not written in stone and when the stalled price of one house applies to almost every other, it should be apparent to everyone that no one household is actually any worse off in terms of comparative property values.
As long as the eventual result is not deflation, this is one possible silver lining to the credit crunch. Another is the benefit to first time buyers, who will almost certainly find homes more affordable because: a), prices will not rise as fast as they have been doing and in some cases may even remain static; and b), they will face less competition from second- or third-time buyers.
Critics may argue that this “benefit” means nothing if stricter lending criteria among banks and building societies simply means less money available to first time buyers. However, given the basic reason for this crisis in the first place – i.e. throwing money at people (whether in the UK or the US) who did not pass the financial criteria to become homeowners – and with more than a million mortgages a “cause for concern” (according to the FSA), can this be such a bad thing?
Recently the Property Industry Alliance said that overly restrictive investment rules were discouraging the setting up of Real Estate Investment Trusts and that a loosening of red tape would help the Government towards its target of providing 240,000 new homes each year.
According to the PIA, REITs would help provide high quality rented homes to those who could not afford to buy a home of their own or did not qualify for rented housing.
But why confine the opportunity to these categories?
It should be possible – indeed, considered desirable – to create a scenario whereby renting, as a viable long-term alternative to owner-occupation, becomes an option available to people in every sector of society (just as happens on the Continent). For years commercial property developers have profited from building offices in suitable locations and then letting the space out on long-term leases to carefully picked tenants, and there is no theoretical reason why this cannot be applied to the residential sector.
If developers and the institutions who fund them had the will – and there were sufficient economies of scale – then even people in a position to afford to buy a home might eventually prefer to rent over a working lifetime, especially if we had a low-inflation economy, in which a “hedge” against rising living costs (such as property) is not deemed so important to the vast majority of citizens.
If such a choice were suddenly to become available today, then most people would still opt to buy, given our historical fascination with home ownership, but over time the benefits of long-term renting (flexibility, lower outlays, etc) for people with certain work-lifestyles may become more apparent.
For the time being, however, the credit crunch will inevitably mean a substantial proportion of young people, who would normally have become first-time buyers over the next two or three years, staying in rented accommodation for a while longer.
This bodes well for the residential letting sector, just as it was an unexpected beneficiary of the recession of the mid-1990s. Experience then showed that, whatever way the property market was performing, life still went on and the inability to sell a house did not prevent people from moving house if they had to – e.g. relocation, family downsizing or divorce. This resulted in an unprecedented demand for rental property from beyond the sector’s core market of students and young, single professionals.
Whatever the squeeze on credit, this optimistic scenario for the letting sector is likely to continue, especially as the Bank of England seems to think it can lower interest rates without risking inflation.
Thus a rental property, or portfolio of rental properties, will be like the curate’s egg – good in parts. Investors can look forward to a sustained period of high rentals and low voids but further capital appreciation is unlikely until the credit crunch is over and the money taps are turned back on again, however distant that may be.
David Alexander is proprietor of a firm of letting and estate agents with offices in Edinburgh, Glasgow, London and Dubai.
_THE SCOTSMAN, 20 March 2008_