Sub-prime crisis may be devastating the US, but other factors are at work here
In the UK, as in the US, the bank credit tightening has moved beyond real estate to business more generally. It is accompanied by a weakening of demand, dismal economic data from America, Europe-wide falls in retail sales and a decline in the service sector. The stock market has sunk and the demand for further stimulation of the economy seems irresistible.
The behaviour of the banks is lemming-like. A few months ago they were falling over themselves to lend anything to anyone, no matter the risk: now, they’ve adopted the interesting business model of wanting to lend nothing to no one, no matter the security. In the UK mortgage market, that attitude has sent business crashing in the less solid intermediaries so that one sub-prime operation has reported a 70% decline.
The squeeze on amateur property investors is crushing, as banks demand a greater injection of equity in return for continued loan support. As property values fall, repossessions will rise, distorting the market still further. The scenes that have become commonplace in the US over the past 18 months will become a feature of life over here.
Yet the situation in the two markets is different and, by ignoring the differences, we in the UK are in danger of so intensifying an adjustment that it becomes a full-scale collapse.
Compare the UK with the US…
The US has built too many houses. The UK has built too few. Commercial property in both countries has been overpriced, but the scale is entirely different. Over the water, the scramble to buy property assets with huge short-term loans at inflated prices has put developers at real risk. In New York, Deutsche Bank has been left with seven Manhattan office towers on which they lent £3bn only a year ago. There are plenty more similar situations coming along as commercial property values fall by more than 10%.
In the UK, however, the situation has been much more controlled. Most of our big operators have been preparing for this adjustment and, rather than increasing their exposure, they have been judiciously unloading less favoured properties. They are thus in a much better place than many in the US. So, the much advertised British Land results are not necessarily the harbinger of serious recession but merely a glimpse of the obvious: property values have fallen, so the value of the BL portfolio has decreased. What matters is the underlying solidity of the business, and the fact is that prudent management means that it is well placed to make the best out of straitened circumstances.
…and that shudder of fear is ill founded
Yet a shudder of apprehension has gone through the property world, as if all this is a terrible surprise and the sign of imminent collapse.
Instead, we ought to realise that the day of doom is only at hand if we will it so. Just because many younger business people have not experienced difficult times, that doesn’t mean that the rest of us should become suicidal. And that is precisely what it is. We are bent on our own destruction. We are making the whole situation worse by painting it in such extreme colours and by suggesting that the situation here is entirely comparable to that in the US.
We ought, instead, to take stock of the real situation. UK commercial property prices are moving more in line with reality – an adjustment that has been foreseen by the key players. Plans for the development of what would have been excess new capacity have been shelved or delayed sufficiently to mean that we are unlikely to have a vast oversupply of office space.
There is therefore no reason to turn this welcome re-assessment into a disaster any more than there is on the housing front. There, demand far exceeds supply – the exact reverse of the position in the US. Falling interest rates will rescue most of the over-borrowed, who will ride out negative equity, real or perceived, as long as those rates remain low. Traditional lenders will return to lending and there may well be new entrants to the mortgage market as the sovereign funds begin to recognise the solidity of the situation and replace the Americans who have hied off home.
If the property world can get the situation in proportion, it would do much to improve the sentiment and help to stop the UK from following the US deeper into recession.
John Gummer is Conservative MP for Suffolk Coastal and a former Secretary of State for the Environment
