The Property Market and the ongoing Economic Crisis

It seems that economic conditions are once again taking a turn for the worse.  This is hardly surprising.  The problems we see today are simply those that were suppressed by government intervention in 2008, namely excessive borrowing at both individual and national level.  Governments managed to reduce the impact of the crisis in 2008 by reducing interest rates and pumping money into the economy via quantitative easing.   This gave the illusion of recovery and growth without solving the underlying problem that too much money had been lent to those without the ability to repay. 

Now that governments are being forced to address these problems, and try to reduce their deficits to manageable levels, this naturally means support for the economy will have to be reduced, which will, as the tide goes out, expose those who were relying on that support. This is even evident on an international level, particularly in the current Euro crisis, in which the stronger Euroland economies are being forced to prop up the weaker ones.

So, how does this affect the property market? 

In some ways the property market is in a good position.  The fact is that the property market was at the sharp end of the ongoing economic crisis back in 2008.  The initial manifestation of the crisis was in banking which resulted in a drastic reduction in mortgage lending, which provided a shock to the property market.  The level of mortgage lending we see today is sustainable and we should not see further reductions in mortgage availability if the economy takes a turn for the worse now.

It is also fairly clear that we will be in a low interest rate environment for the next year or two. This means that funding, for those creditworthy enough, ought to remain relatively cheap.  Economic problems, however, will mean that banks will remain unwilling to expand their mortgage offers greatly, and many will still be unable to obtain a mortgage.  this will remain the case until the economy as a whole begins to grow and the banks see that the crisis is in the past. This means there are good opportunities for long term buy to let investors, with the rental market booming, being fuelled by those would be first time buyers who are unable to obtain mortgages.

What we also see is that a buffer of would be first time buyers is being created.  This creates a hidden demand, for a certain class of properties, which will not go away.  As soon as funding is available for these buyers they want to get onto the property ladder.  So if you invest now in this type of property as a buy-to-let investment you will not only have good rental income but also the prospect of hidden demand being unleashed in the medium term, to provide a good capital return.

So, while we always have to be aware of the impact of general economic conditions, specifically as they affect tenants and buyers ability to pay, we must also take advantage of the situation we find ourselves in.  Property still remains a good investment in the current climate, for those with a medium to long term outlook and available funding.