While most accept that property values are cyclical, where we are in terms of that cycle is the subject of intense, competitive and often heated debate.
I always marvel at how two people with similar roles and backgrounds in the industry can completely disagree with each other as to where we stand in that cycle – bears v bulls, and all that.
Recently, on two different panels I participated in at industry conferences, the inevitable question was asked, and different answers were duly provided by the various panellists. Of course, the reality is none of us know where the future will go, albeit we all try to estimate the future.
Typically, that estimate of the future is based on our own reading of the current market (no two people will ever perceive the same event as identical), our own knowledge, understanding and interpretation of history, and the external or internal forces that we choose to let influence our views on the market – research reports, statistics, “gut instinct”, panellists and so forth.
I try to spend as much time as I can researching past events and contrasting them with events today, to try to draw conclusions from the data as best I can. At the same time, any new market conditions that did not exist in past market cycles should in theory be taken into account – albeit I generally have a high disregard for these; they are nearly always the same market condition, just re-packaged for modern consumption.
As a mathematician, I try to base my decisions solely on data, although even then, cognitive science shows us it is impossible not to be influenced by our past to some extent in decision making, even if we consciously believe we are not allowing ourselves to be so.
You can also interpret data and statistics any way you like. Caveats aside, I did disagree somewhat with some of my fellow panellists, when the comment was made that we are probably “back at 2005” in terms of the real estate cycle today. For me, the data just does not show us as being anywhere close to the hubris of 2005.
The key driver for this comment from my other panellists was credit related. It is widely accepted that for real estate finance in London, capital is plentiful – both debt and equity. It is also widely accepted that the rest of the UK is starting to get greater access to capital, too. However, the thing that tends to get overlooked (in my opinion), is that this relates to finance predominantly for large institutional borrowers which are buying or developing assets.
The largest part of the real estate finance market by actual quantum, is mortgages – for end users or buy-to-let investors. And mortgages are still nowhere near the levels they were in 2005 – either in terms of LTV, credit quality of borrowers, quantum, number of lenders in the market, or even speed and efficiency of the borrowing process.
I will discuss in another article some stalwart research behind the main causes of real estate cycles – ie are property price cycles demand led and based on price expectations theory, as Robert Shiller at Yale University would argue, or are they led by the supply of credit, as Susan Wachter from Warton writes, or John Geanakoplos, also from Yale?
Yes, two differing opinions from two Yale professors. For now, I will conclude that most research I have seen seems to indicate that credit cycles and associated terms – especially LTV, covenant strength of borrower, pricing and quantum of available credit – drive real estate cycles. And the introduction of the Mortgage Market Review in the UK mortgage market, which Savills recently described as the single biggest impact on the UK property market since the global financial crisis, is creating massive constraints on the mortgage lending market in the UK.
So MMR, plus the fact that we are clearly a long way anyway from the 110% LTV mortgages, “originate to sell” RMBS, covenant-lite, “Alt-A” and sub-prime lending world that existed in 2005, is why I would disagree with anyone who thinks that we are already back at those levels in this cycle.
Randeesh Sandhu is chief executive at Urban Exposure
