Lending Excess, Regulation Poverty and the Global Property Mess

The US, UK and Europe may officially be out of recession but they still seem to be making a mess of their respective...

The US, UK and Europe may officially be out of recession but they still seem to be making a mess of their respective property markets. A lack of lending regulation and high loan-to-value (LTV) ratios in many countries have led to negative equity, even in economies historically pegged as the most stable. However, little is being done to ensure lending is sustainable and already there is talk of property bubbles emerging in economies that have just recently waved goodbye to the spectre of recession.

With lending only set to get more expensive, property investment needs to be approached with greater attention to personal affordability than ever before. A recent report on the Dutch housing market by the BBC has made it clear that nowhere is safe from the spectre of instability. While Spain, the UK and the US were the main countries affected during the onset of the financial crisis, this simply isn't the case any more - problems are becoming apparent in other countries too.

Holland is now home to 650 billion euros in mortgage loans and properties are worth 25 per cent less than they were before the financial crisis. The housing bubble has burst and no other EU consumers are in the same level as debt. Dutch bank ING Groep NV recently told the Wall Street Journal that the Netherlands will continue to have its earnings squeezed throughout 2013. The bank itself reported a 39 per cent drop in Q2 net profits.

It seems the most shocking thing about the Dutch crisis is that the economic zone was seen as exemplar. In fact, the Dutch had criticised other countries for not living within their means. However, now many are unable to sell their homes and are in a state of negative equity. According to Dennis Stello, principal of Match Makelaars in Rotterdam, the fault lays at the door of politicians. He told the BBC that tax breaks for mortgage borrowers had been set at an unsustainable rate, inflating prices to the point that nobody can afford to buy.

Politicians failed to act on warnings about lending regulations, instead introducing vote-winning policies. Consequently, the market crashed and prices don't look set to have bottomed out just yet. "In my opinion prices will keep coming down two or three per cent a year until they end up around half of what they were," Mr Stello said. "They could fall even more as and when the European Central Bank raises interest rates."

However, it isn't just Holland that continues to be threatened by excess lending and a lack of regulation. Even the UK, which is only now starting to rebound from the market crash, is already been earmarked for property market volatility. Experts claim the government's Help to Buy scheme will falsely drive up values by increasing lending.

A Reuters poll of economists has recently put the chance of out of control growth at 50-50 or higher. Concerns are increasing that the UK is falling back into the same mentality seen before the recession, which led to a tripling of average house prices over a ten-year period. Out of 29 economists, only nine think the risk of a price bubble is small. However, for some the concerns go much deeper. Danny Gabay, economist at Fathom Financial Consulting, told Reuters: "We're not concerned about a new housing bubble, we're concerned about the fact we never worked off the last one before they began to re-inflate it. We've stopped any attempt at any of the repair work that is essential for this economy to be able to heal properly."

Only one country seems to be taking steps to get control of lending and that's Switzerland. In 2012 the country decided banks needed more capital to cope with excessive credit growth. This means that if prices fall astronomically, there will still be capital there to cover the difference. This does require Swiss banks to go pretty close to the line with risk but the move to legislate to protect against a crash should be rewarded. Europe, the UK and US should certainly follow their lead, creating assurance to protect against over-inflation and ensure sustainability. Failure to do so means in another ten years we could find ourselves in the same position.

- Tuesday 20 August 2013

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