As you have probably gathered by now Property Finders London are fairly conservative in our attitude to risk and wary of schemes such as Help-To-Buy that lure those who can least afford it into taking on large loans. Yes, mortgage rates are at historic lows so they seem affordable now, but what would happen if interest rates reverted to their mean of 8%? Admittedly I am probably still scarred by my first mortgage of 12% (which was affordable because I only borrowed 2.5 times my earnings) and it is entirely possible rates will be held at these low periods for the foreseeable future – think Japan.
However, what is interesting about this low rate environment is not that it makes borrowing more “affordable” as the bulls would argue. No, what is more interesting is that a study by Estates Gazette has discovered that 35% of homes in the UK were bought without mortgage finance in the year to September 2013 (£83bn of 237bn). In comparison, in the five years to 2007 cash purchases averaged 10-15% of transaction totals.
We imagine that this figure is even higher for prime central London and lends weight to the argument that London will be more resilient to another downturn because there are less people who will be forced sellers. And this is really the key point: if the market crashes it is completely irrelevant if you do not need to sell. It is only those people who are over-leveraged who will suffer –. The falls in prices will invariably happen “at the margins” for those who have miscalculated their financial resilience in the face of a collapse (be that property, financial or employment) and the number will not be inconsiderable.
As property search agents, we have to be conservative so the first thing I highlight to clients are the potential risks. Admittedly many of my clients are what the media might dub “recession proof”, but they have managed to acquire this position by understanding the risks of their actions. Of course, prices may well continue to climb and it may be another decade before we see another crash – it is inconceivable that there will not be another crash as human nature guarantees it – but it is always worth considering whether you have a suitable margin of safety in case a black swan smashes into your proverbial windscreen.
As always, if you need help or just want to chat to someone about the London property market, then please get in touch. We are happy to assist in anyway we can.