THE BURSTING BUBBLE – Property crash 2008
By Ian Fraser
Published: Sunday Herald
Date: December 28th, 2008
Image courtesy of Greenwich Mean Time
THE wall of cheap credit that banks lavished on the UK property sector between 2001 and 2007, combined with their customers’ proclivity to borrow, caused huge distortions in the property market.
Bubbles expanded in both the residential and commercial sectors of the market, further fuelled by a tide of speculative and buy-to-let investment. As valuations stretched to breaking point, the International Monetary Fund warned that UK property prices were some 30% higher than was sustainable.
Artificially cheap and easy credit could only mask these realities for so long, and valuations went into freefall. According to the most reliable estimates, house prices have fallen by between 12% and 15% during 2008, while commercial property is down a whopping 40%.
Whole swathes of the housing, commercial property and construction industries went to the brink. Some 20,000 construction industry jobs have been lost in Scotland at firms such as Miller, Cala and Stewart Milne, and Michael Levack, chief executive of the Scottish Building Federation, fears that the lost skills mean Scotland will struggle to build the “inspirational projects of the future”.
Related areas, including professional firms specialising in property, have also been very hard hit. Already, Edinburgh estate agent Stewart Saunders has gone bust, and other firms are either laying off staff or reassessing their futures.
Banks that previously were willing to lavish credit on the property sector have, perhaps unsurprisingly, been taking a much dimmer view. Not only has the supply of new loans become a trickle, but existing borrowers are having their rates of interest hiked up at renegotiation time. And despite the government rhetoric, the banks advanced 61% less money into new mortgage lending in November 2008 than they did November 2007.
The credit squeeze and falling prices also made life tougher in commercial property, with Glasgow-based developer Elphinstone forced, for example, to scrap plans for Scotland’s tallest building – a £120 million, 40-storey tower at Charing Cross. Highmore Homes, formerly part of the Kenmore Group, and the luxury developer Gregor Shore have both entered administration. The new mood of cautious conservatism among banks risks pushing scores of others over the edge or forcing them to cut back drastically to avoid breaching covenants.
The one positive is that as commercial property prices fall, yields do tend to rise. And if yields rise to 8% or more, then the market is going to become increasingly attractive, especially to bargain hunters from overseas.
However, Dan Macdonald, chief executive of Macdonald Estates, believes that if such buyers do emerge, it will only be because the UK’s commercial property market is effectively bust. “Britain looks like a bargain store – a pawn shop – for prime investment property,” he says.
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