To buy or not to buy, that is the question.
The American and Spanish property markets have stalled. It seems that billions are being wiped off the stock market value every day. SocGen, Jerome Kerviel and Northern Rock are just a few of the names that we now see in our news on a daily basis. Japan, the world’s second largest economy announced earlier this month that its economy was no longer “first class”.
In the aftermath of the American sub-prime crisis many of the worlds largest and wealthiest Banks are reporting their worst quarters since they were founded. Heads are rolling at the top and investors are baying for blood. But is it really all doom and gloom? Is the end of the world nigh? Will the stock markets volatility take us to the gates of hell? Is Armageddon fast approaching? Well if you are to believe the market analysts who are predicting further market falls that would certainly appear to be the case.
But who exactly is being affected? Well the banks for a start. Many lenders are nervous and indeed unwilling to lend to one another, which is of course detriment to commerce as a whole. Hard working ordinary individuals will suffer as their pension funds take the hit and those foolish enough to still take out endowment mortgages might find that they don’t have enough to pay off their mortgage when their term expires.
So is it now time to keep your hands in your pockets? Is it time to stock up on bottled water and tinned food? Are the doom mongers right should we turn off the music, switch off the lights, celebrate, this party’s over, I’m going home. The answer is no. Confidence like happiness is a state of mind. One mans misfortune is another mans gain. Yes interest rates rising affect us. Yes rising oil prices affect us, but those of us not “savvy’ in the stock markets are more or less exactly where we were.
The reality is that its no secret that both the American and Spanish property markets were over valued. Through a combination of market forces, over valuation and bad lending banks are having to face up that there are some rather large black holes in their accounts. Spain unlike Ireland, the UK or other parts of Europe for example has an usual way of valuing its properties. It’s not unheard of that owners rather than real estate agents or even valuers dictate the value of the property.
First time borrowers are under huge pressure to make up the shortfall of 20% needed to purchase their first home as many lenders here cap the loan to value rate at 80%. This in turn may lead to pressure on the valuer both from the buyer and the bank to over value the property in question in order to make up the 20% and cover costs, which include purchase tax. So a property in reality worth €160,000 might be valued at €200,000. The housing market begins to slide and suddenly there’s a lot of negative equity around. Coupled with bad lending which leads to loan defaults it’s a recipe for disaster. But that’s the thing with greed, it can blind side you and end up biting you in the bum.
For most of us though there was never as much money in our pockets as we were led to believe. I for one, when I lived in Ireland, found it laughable when the government kept telling me that we’d never had it so good and yet I seemed to be living from pay packet to pay packet. Sure my wages had risen. Sure interest rates were at record lows but the fact was that the cost of living had risen faster than that of my wages and the record low interest rates were coupled with house prices that were simply out of my reach. We are the “Credit” generation. Where our parents thought long term by putting aside anything they could for a rainy day we spend spend spend. And when we’ve run out of our own more money to spend we spend other peoples by using credit cards.
When I started my career in banking in 1994 many people were still paying mortgage interest rates of around 12%. As rates fell we were advised to advise our clients to fix their mortgage rates. This meant that whilst the rates dropped throughout the 1990’s we had advised many customers to fix at the higher rates thus meaning that our clients, the people we were supposed to advise and protect were still stuck paying higher rates. Good for the bank, bad for the customer.
Essentially, in my opinion, banks are a bit like bookies or bookmakers; they rarely if ever loose but give the impression that you’re the real winner and they are in fact the looser or facilitator. The truth is that in Ireland for example it became and has become very difficult to run a family home. With the monthly cost of childcare on parity with that of your mortgage payment, not to mention the spiralling costs of living in general, many are living on very small margins and unless you begin to take on the attributes of an accountant there may well be trouble ahead.
To those who only spend what they can afford things haven’t really changed that much. While Banks, Builders and Real Estate Agents are bracing themselves for a nightmare 2008 those of us who never really bought into the “you never had it so good’ rhetoric from our respective governments and economists might just find that there’s one or two bargains to be had out there and that the economic outlook must be viewed with a sense of perspective.
Yes there is change ahead. Yes there seems to be an economic shift from the West to The East, which has seen the rise of both the Chinese and Indian economies. But now is not the time to panic. If house prices fall you don’t have to put your house up for sale the next day. It’s the same with shares, yes there is widespread losses and indeed widespread panic which in turn leads to further losses but the housing market like the stock market remains the same, buy low sell high, sounds pretty obvious but as long as you stick to that golden rule the worlds economic outlook need not be yours.
Read more about Polaris World Properties and the Polaris World Buying Process