London Property Review Of The Year ‘08

By Author: Secureasale
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2008 was a rollercoaster of a year for the UK's property market. SecureASale Director Tim Jackson looks back on the ups and downs of London's housing sector over the past year
2008 started slowly with the hangover for the manic record market of ‘07. By the end of 2008, the UK was in the worst housing slump since the 1930s. There are three main factors that have contributed to this heady downward spiral.

1 / Cyclical economic slowdown

After 15 years of non-stop growth, the UK economy had overheated and house price inflation had far-outpaced rises in average earnings. The average home was costing 7 times average earnings, which was unsustainable. A policy of low interest rates had led to the availability of cheap credit and properties had seemed affordable despite the ever-increasing prices. However, nervous of inflation running rampant, the Bank of England MPC gradually raised interest rates up to 5.75% in July 2007. This hit highly-leveraged borrowers hard, especially those on interest only mortgages and had the desired effect of substantially cooling the housing market.

2 / Worldwide banking ...
... crisis

When Northern Rock collapsed in the summer of 2007, it wasn't a one-off event but was linked to the fallout from the sub-prime market both here and in the United States. Banks worldwide had gambled by lending to un-creditworthy customers who were left unable to afford their loans and therefore defaulted on them, often literally handing back their keys to the lender. As Northern Rock had grown its business by taking on risky debt, it soon found itself unable to secure funding to operate and the government had no choice but to bail it out. The banks then all took note of this and substantially tightened their lending criteria. In a matter of weeks, the days of 100% mortgages were gone and loan to value ratios were cut dramatically.

3 / Lending halt

This alone would be enough to cause a housing crash, but on top of this the banks stopped lending to each- other almost completely. This credit crunch affected the entire economy from small businesses to the largest industrials and we are now seeing the rising unemployment and reduced spending that a shrinking economy causes.

The result of this unhappy alliance of bleak news is that buyers couldn't borrow money to fund their moves, vendors couldn't afford to take lower offers on their homes as that often dragged them into negative equity and thousands of builders, estate agents and mortgage advisors went bust as business dried up.

The lettings market has been hit too as thousands of homeowners, unable to Sell House Quickly but needing to move have found themselves having to let their properties out, in effect becoming reluctant landlords and massively increasing supply. The result of this is that cash for houses have been dragged down in the rental sector and many buy to let investors are finding that their rents no longer cover their costs and their investments are repossessed by the bank, further damaging the market.

Is there a way out of this crisis?

The only route back to stability is for the banks to begin normal lending again both to each other and to homebuyers. Without this the market is in for an even worse 2009. Only time will tell.

About - This article was written by SecureASale Director, Tim Jackson. To learn more about Tim and SecureASale's services, visit http://www.secureasale.co.uk.