Viewpoint: Recessions can become self-fulfilling prophecies

Jan 16 2008 by Phil Rees-Roberts, Liverpool Daily Post

SOMETIMES, I think the financial papers can be a bit like football fans baying for the England manager’s blood. Invariably, they get their way.

In the same way, recessions become self-fulfilling prophecies when doomsayers predict the collapse of the property market. The market is understandably pessimistic because of unrealistic prices which peaked 18 months ago – across the spectrum, all prices were high and every- one knew it was not sustainable.

The banks’ lending in the property sector looks over- exposed, but hopefully most of this is tied up in secure investments taken at a time when interest rates were attractive to developers.

The risk is that people will panic and abandon half- finished developments or difficult investments, leaving over-lent banks desperate to get rid of properties their customers have just acquired. This would create a false market in terms of price and supply, and take a long time to recover from.

There is hope for a soft landing, and the Bank of England seems to have anticipated this, following their unanimous decision in December to reduce interest rates. Much will depend on whether office space demands and decent rent levels can be sustained.

The institutional investment funds which acquired their investments too late in the cycle and at the wrong prices look like losers but that’s not necessarily reflecting a problem with commercial property as a viable asset sector. Their client’s loss is the shrewd investors gain – not everyone can be a winner.

There is still market demand for the right deal, with plenty of cash-rich investors waiting in the wings. Although there may be a reduction in speculative development, businesses with solid balance sheets will have the staying power needed for these testing times.

The market must be allowed to reorganise and correct itself, with the benefit of further interest rate cuts this year.

Viewpoint, by Phil Rees-Roberts of Liverpool law firm, Rees-Roberts Solicitors