By David Stevenson on Friday 17 June 2016
Investors are always on the lookout for big signals indicating a big move in a major market. The news today that leading house builder Berkeley Group says that reservations for its new homes are down 20 per cent could be one of those important sell signals. If the residential housing market is set for a downturn, surely p2p investors should start bailing out of property based lending platforms such as LendInvest and Landbay?
I’m no enormous property bull but even I have my doubts that the classic sell moment has at long last arrived for UK property. Yes, the news from Berkeley is worrying but it only confirms what virtually everyone has known for some time – that high end, central London premium property is under pressure. According to Berkeley, “global macro uncertainty and the impending EU referendum have had a dampening effect on investment levels across all businesses and this is likely to continue up to and immediately after the result of the referendum. This, along with the market adjusting to higher levels of property transaction taxes, has affected the upper end of the housing market in London".
This chimes with anecdotal evidence I’ve been hearing for months, namely that properties above £1m are proving increasingly difficult to sell for anything remotely approaching the asking price – with the volume of actual sales falling sharply.
But this doesn't necessarily mean that lenders on property platforms are in imminent danger. The most obvious point to make is that the leading lenders such as LendInvest and Landbay actually have relatively low exposure to the core, premium London property market. Most of the loans on these platforms are in the greater south-east and the English regions with the Midlands and the North West especially popular.
The good news here is that outside of the principality of London, the residential market seems to be in decent shape. According to Berkeley Group’s chief executive Rob Perrins “underlying interest and demand remain good" and prices for properties in the "more mainstream" market - those worth less than £1.25m - are still rising. Again this chimes with my own anecdotal evidence. Decent regional properties selling for below £750,000 seem to be much more in much better shape with demand fairly buoyant.
It goes without saying of course that London and the rest of the UK are not unconnected – a deep freeze in London must inevitably have a knock on effect first in the South East and then the rest of the country. My own guess is that if the London market continues to stumble throughout the remainder of 2016, we’ll see a correction hit regional markets at some point in early 2017.
But even at this point, I’d be cagey about calling a big property correction. We could, of course, be about to enter into a recession – especially following a Brexit – but I’m far from convinced that the global economy is one step away from a meltdown. Growth rates are subdued and volatile but it doesn’t seem to me like a nasty recession is actually that imminent. Perhaps, more importantly, we also have to accept the sad reality that quantitative easing with its accompanying low-interest rates is having a direct impact on house prices. I just managed to re-mortgage our own French property on a 20-year loan for a rate of 1.5%! UK rates aren’t quite as competitive but zero bound rates are helping tens of millions of property owners refinance their debts and keep interest payments low. Crucially I don’t see one scintilla of evidence to suggest that the central banks are about to abandon this low rates policy. Interest rates may creep up to 1.5% at most but they’ll come down very sharply because by then we’ll have entered into another recession.
If we did enter a recession after a sudden rates rise I think it entirely possible that property prices could fall by 5 to 20% but even in this scenario, I’m not too sure that p2p lenders have that much to fear. Most platforms insist on fairly stringent Loan to value ratios with most below the all-important 75% level. These numbers imply that even if house prices did fall by 20% most loans would still have some equity in play. A bigger risk perhaps might be residential landlords with large buy to let portfolios caught out in a liquidity trap by a sudden toughening up of credit facilities – in this case, we could see payments missed and platforms forced to step into the breach to take back security. But overall I don’t see a meltdown imminent although I would also say that a sensible re-pricing of risk might be appropriate at this stage. My own sense is that whatever the loan rate was at the beginning of the year, I’d be looking for an additional 1.5% to 3% to compensate me for the obvious future risks.
So, on balance I’d be cautious about becoming overly bearish on property lending – many of the structural drivers of increased value haven’t changed in any substantive way outside of London. Where I’d be increasingly cautious though is on crowdfunded equity property – here you’re fundamentally looking at a capital growth proposition, if only because running yields are so low in historic terms. I’m not convinced that we’ll see strong capital growth in the immediate future in which case investing in residential property might be a terrible waste of money in the short to medium term.