According to John East of Kinleigh Folkard & Hayward, property is a “sensible investment.” So if you are a buyer, you should be “going for something as close to your financial limit as possible as it will pay off in the long run.”
Hmm. He should try telling that to the rising number of people who, what with going for things close to their financial limits, now find they can’t make their mortgage payments.
The latest Credit Conditions Survey shows that the default rate on “secured loans to households” – which means residential mortgages – rose “unexpectedly” in the first three months of this year. It’s hard to see what the unexpected bit of this was, given rising unemployment and falling real incomes.
If you are “close to your financial limit” and inflation is 5.5% at the same time as your wages are rising by only 2.9%, it doesn’t take much for you to find yourself just a bit too close.
Richard Banks, the chief executive of UK Asset Resolution (which is managing the sub prime mortgage books of Northern Rock and Bradford & Bingley) at least recognises this. With an eye on inflation, unemployment and the rising tax burden, he has hired an extra 50 people to work in his arrears division. He has also been contacting customers who look like they might be at risk: of the 600 UKAR has contacted so far, 30% have said they “have problems.” That’s a lot more people who probably don’t wish the likes of East and his advice particularly well.
The truth is that property can be a sensible investment. But it is only one when it comes at the right price, and when that price is one the buyer can afford to pay. Drop one of those things, and it is usually a rubbish investment, as a depressingly large number of people are still finding out to their cost.
On the plus side, the FT reports today that over three quarters of would-be first-time-buyers are delaying their efforts to buy a house because they can’t come up with the deposits the lenders are demanding.
It isn’t nice not to be able to have what you want when you want it. But with a bit of luck these buyers will find that in five years they will be glad they were forced to wait. Interest rates may be higher by then, but if the market has done what markets always end up doing, prices will be much lower. As, for that matter, will deposits. If so, they might find that property is once again both an affordable and a perfectly sensible investment.