Don’t let the tail wag the dog  

This week saw many mortgage products being withdrawn to be replaced by higher rates.  Only yesterday there were a couple of clients who didn’t manage to lock the rate which they had hoped to secure.  Even a small fraction of a percentage increase translates into hard cash, and it can be substantial; especially over a longer fixed rate period.   
  
We are currently in an environment where the rates will be rising, the majority of people will take this as a reason not to invest.  However, it is this type of environment where deals which have never been seen before start to come to the surface.  Stability and cheap rates do not encourage vendors to sell.   
  
Things work a little differently in Central London however, where there are a lot of cash buyers, who for the right property will be making aggressive offers.  Recently, a flat which was being sold attracted multiple offers, two of them being all cash.   
  
On the other end of the scale rents are rising to unprecedented levels, this is a consequence of many landlords exiting the market and first time buyers being unable to purchase, therefore limiting the supply of rental stock and increasing the demand for it.   
  
It is always important in this type of environment not to let the tail wag the dog; meaning not to lose sight of property being a solid investment class.  
  
The other point to note is we are in a high inflationary environment, which is running higher than the average prevailing interest rates.  This means any debt which is taken will be reducing in real terms.  Therefore you will be actually making money on debt which you take, from this angle debt is good.   
  
For example, if you borrow £100,000, as the current rate of inflation is running at nearly 9%, in one year’s time your money in real terms would only be worth £91,000.  If you paid 5% interest the debt would have cost you £5,000.  This means overall in real terms you are still £4,000 better off.  In real terms any debt you take will shrink, being eroded by inflation.   
  
This environment has not stopped us.  We expect the deal flow to steadily increase as time goes on.  There will be those who need to and have to sell.  The three D’s, Death, Divorce and Distress.  There will be many half completed developments coming up, we have already seen one in North West London which has come to the market, where the developer didn’t anticipate an environment where the interest and the building costs have risen substantially.  Half finished deals are difficult for funding purposes, as often it is difficult to obtain warranties and guarantees for half completed works.  In fact it may cost the incoming buyer even more money than if the works had not been done.  In order to have sign off from building regs, they would need to undo the existing works, unnecessarily adding to the development cost.   
  
We will be facing interesting times in the coming times.