Another good reason to sell out of commercial property

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There were plenty of things for us all to be concerned with. Housing could be in trouble. So could commercial property. Then there's stock markets to worry about. Oh, and of course, there's that nasty credit crunch business that everyone seems to have forgotten about.

There were plenty of things for us all to be concerned with. Housing could be in trouble. So could commercial property. Then there's stock markets to worry about. Oh, and of course, there's that nasty credit crunch business that everyone seems to have forgotten about.

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There were plenty of things for us all to be concerned with. Housing could be in trouble. So could commercial property. Then there's stock markets to worry about. Oh, and of course, there's that nasty credit crunch business that everyone seems to have forgotten about.

In short, it seems the financial system just isn't that stable anymore

The Bank of England didn't tell us anything we didn't already know in its Financial Stability Review.

But with vested interests across the property and stock markets desperately trying to make us all believe that this summer's problems were a blip, it's a sobering and useful reminder to hear such a downbeat assessment of the economy coming from an authority like the Bank.

As Kelvin Davidson of Capital Economics puts it, the review "has a distinctly more cautious tone than those of the recent past." One of the Bank's key worries is the property market - both residential and commercial.

On the residential side, there has been a "very significant tightening in credit conditions in the subprime sector as many specialist lenders in this market have raised rates, withdrawn products and lowered maximum loan-to-value ratios."

Anyone forced to refinance a typical sub-prime mortgage in the next three months is likely to see their rate rise by 2.5 percentage points. Davidson points out that this would be £230 a month extra on a £150,000 repayment mortgage - a jump of about 27%. Now, given that sub-prime borrowers by definition are the types of people who are vulnerable to payment shocks, that has to mean rising repossessions and arrears problems.

Also, the Bank has confirmed what we've been saying for quite a while - that buy-to-let investments make no sense. It reckons that after costs, the average residential rental yield is 2.3 percentage points below the rate of their home loan. So, as Davidson puts it, "recent BTL investors have been relying on solid capital gains" to make any money.

But of course, why would anyone buy a rental property if they thought it was going to cost them money every month? It's only a matter of time before the market comes to its senses and the supply of new BTL wannabes dries up. That'll leave the market bereft of new blood, until prices fall far enough to allow first-time buyers to start clawing their way back onto the housing ladder.

The commercial property market looks vulnerable too. Even before the credit crunch, there was enough property in the pipeline for people to be worried about potential oversupply. And in the City - where jobs are already being lost as a result of the crunch - the potential overbuilding is most obvious. The City office development pipeline in 2008 "will be at its highest level since 1991," says Davidson.

Demand for new space may start falling just as investment banks uncover more nasties on their balance sheets - Merrill Lynch has just seen its worst loss in 93 years, and the credit crunch has really only just begun. If that happens while supply is hitting its highest in nearly two decades, then commercial property - the most popular retail investment for several years now - could go into a serious downturn.

The Bank's also worried that financial institutions haven't learned any lessons from the Northern Rock crisis. Apparently, "contacts report that there is already some evidence of credit spreads falling and new loans being distributed with apparently reduced credit standards."

Well actually, financial institutions have learned something - that the powers at be will do whatever it takes to bail out a bank in trouble. Over here, the pundits have largely shifted their attention to blaming regulators for not doing enough to engineer a consequence-free bail-out for Northern Rock on the quiet, when in fact the best way to stop all the lax lending would have been to let the bank go to the wall rather than prop it up with taxpayers' money, which I suspect was Mervyn Kings initial inclination.

And of course in the States, Treasury Secretary Hank Paulson and his chums at the big investment banks have set up their very own bail-out fund, the super-SIV', which is basically designed to prevent anyone from actually having to sell their worthless sub-prime-mortgage-based assets on the open market. This means they can keep them on their books at somewhere above their real value, thus preventing the true scale of their losses coming to light.

The fact that the Bank is now worried about this, and is happy to admit to it in public, just shows how bad the situation is. As the Telegraph's resident bear, Ambrose Evans-Pritchard puts it in his blog, "the sky has already fallen."

It's only a matter of time before everyone else realises this too.

Turning to the wider markets

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In London, stocks headed higher, helped by solid results from insurance giant Aviva, oil group Royal Dutch Shell and media group Reuters. The blue-chip FTSE 100 index rose 94 points to 6,576. For a full market report, see: London market close

In London, stocks headed higher, helped by solid results from insurance giant Aviva, oil group Royal Dutch Shell and media group Reuters. The blue-chip FTSE 100 index rose 94 points to 6,576. For a full market report, see: London market close

Elsewhere in Europe, the Paris CAC-40 gained 85 points to end the day at 5,760, whilst the Frankfurt DAX-30 was 103 points higher, at 7,932.

On Wall Street, stocks ended a volatile day barely changed. Despite being down more than 100 points at one point, the Dow Jones ended the day just 3 points lower at 13,671. The tech-rich Nasdaq shed 23 points to close at 2,750, while the S&P 500 was down 1 point, at 1,514.

In Asia, stocks were mixed today. Japan's benchmark Nikkei index was higher, up 1.4%to 16,505, as Sony and Honda both beat analysts' forecasts.

Crude oil just keeps climbing. In New York it was trading at $91.75 a barrel, while Brent spot was at $88.

Spot gold was on the up again this morning, last trading at $776. And silver was also higher, at $14.09.

Turning to the forex markets, sterling was trading at 2.0557 against the dollar. The dollar was at 114.28 against the Japanese yen.

And in London this morning, US private equity group JC Flowers has confirmed it's in talks to buy Northern Rock.