The Money Centre Newsletter
We have witnessed the former building societies reporting falls in property prices at percentages in the teens, whereas in auctions properties have sold for as much as 65% less than Comparibles were selling for last year. Volatility has caught many people off guard. At The Money Centre we've monitored property auctions closely and there seems to be no logical explanation why in some months 90% of auction lots sell and a month later 90% do not even make reserve prices.
It's not just property prices that have fallen though - so have the percentages of value that lenders are prepared to advance. This time last year 90% buy-to-let mortgages were relatively commonplace whereas the maximum now is 75% and the best pricing is on mortgage products with LTVs as low as 50%. Several lenders exited the market when their business models seized following the collapse of the securitisation market. These lenders were effectively lending their money then packaging up the mortgages in the form of bonds and selling them on to other lending institutions. When these institutions stopped buying their bonds they soon ran out of money to lend. This created a wave of applications to the remaining lenders and it was not long before they too had fulfilled their lending targets for the year. Accordingly, we have witnessed a decreasing appetite for new business since the middle of the year. If the lending market could have been described as a gushing river this time last year it would be fair to say that it's currently a trickling stream running along a dried out river bed.
Whilst most investors are sticking with their properties and their existing funders on retention products as opposed to refinancing, cash rich investors are still buying. They've realised that 12 months ago would have seen them paying a £30,000 deposit on a £200,000 property. However, it's now possible to buy the same properties for £100,000, invest the same £30,000 deposit and to benefit from a much better return on capital invested. You see, rents have not fallen by much and in some areas they've even increased so the net cashflow after financing costs has to have improved. Add to this the improved prospects for long-term capital growth due to buying at rock bottom prices and it can easily be seen that now is a great time to invest.
For those investors coming out of discounted or short-term fixed rates the recent substantial reductions in base rates will certainly be a major source of comfort.
So what's going to happen next year?
Some institutions are sitting on huge investor deposits and they are committed to paying interest to their depositors. Therefore, they must lend and accordingly I believe that we will begin to see a cautious improvement in lending appetite as we enter 2009. However, don't expect those gushing rivers to return to lending in the foreseeable future. The lenders that are in the market will be looking for a good return on very safe propositions. Having said that, as competition increases for new business I suspect interest rate margins will fall away, credit availability will free up, LTVs will start to increase again and in turn the property market will begin to pick up. Therefore, if you are in a position to invest the time to buy is now, before everybody else can jump back onto the bandwagon. The prices will always be at their lowest when it's hardest to obtain funding.
As for the volatility in reported house prices, my prediction is that auction prices and those reported by the former building societies will find their own level mid 2009 at 30% to 40% below Comparibles back in 2007.
Whilst The Money Centre has contracted significantly, we are confident that we have the right people to see the firm through these difficult times, to enable us to continue providing our clients with a top level of service and to prosper once again when the market recovers.
During 2009 we are also adding a number of other services that have been planned for some time. Many clients of The Money Centre will recall from our workshops over the last few years that it has always been our intention to re-introduce services to ensure that their investments can be passed on to the next generation effectively. A new division of The Money Centre, to be known as 'Living Trusts' will commence trading in January 2009 to ensure that our existing clients have the correct advice to ensure their goals to pass on their assets to their beneficiaries are carried out effectively to enable the right people to get their hands on the right money at the right time. We also have plans to increase our commercial funding activity, the foundation upon which our business was established over 18 years ago.
All that leaves for me to do is to wish you happiness and good health through the festive season and beyond and a prosperous New Year in 2009.
Kind regards,
Mark Alexander
Managing Director, The Money Centre
