The sector downturn could last well into 2009 because the virtual freeze on bank funding is likely to continue throughout next year.
Bank experts say there will be no “short, sharp correction”, as it is becoming apparent that the downturn is bank-led and could be worse than many believe.
“Next year will continue to see the real estate sector starved of debt financing,” said Michael Cox, an analyst at Royal Bank of
“The impact of the summer is going to continue for many months, and well into 2009.”
There had been a consensus that lending would resume in the second quarter of next year, after the large investment banks had ample time to clean up the sub-prime exposure on their balance sheets.
However, there is a growing opinion that this will take at least two quarters, as banks are finding it tougher to shift the unwanted loans that are sitting on their balance sheets.
One analyst at a large
These factors, combined with an expected rise in failed loans and forced asset sales, could see the sector in a sustained period of downturn.
Bankers are preparing for a slew of expiries early next year of fixed-rate loans that were financed on very high loan-to-values. Because many of those borrowers were required to put in only a minimum of equity, falling property values will put their LTVs over 100%.
“This could easily be a 12- to 18-month problem,” said Paul Stevens, head of property at Investec.
He added: “Banks won’t be lending anywhere near the LTVs that they previously were, and the funds will be selling instead of buying. This will lead to foreclosures, and prices continuing to fall.”
