Re: Re: The Building Boom Is Over!
IProperty index derivatives in the UK are currently pricing a 40% drop over the next 3 years.
The property derivative thing was only set up at the end of 2007 through IPD and JLL capital markets; it was believe it or not set up so that commercial property funds that had difficulties sourcing product over the previous 3-4 years wouldn’t miss out on the boom and could bet on further yield compression without the problem of having to find a building with blue chip tenants.
The same people are now telling us that prices that have already fallen close to 20% will fall another 40%; I don’t believe it and maybe I am sitting on that proverbial deck chair as I am exposed to some pretty risky plays working in property and holding bank stock.
There is no question that banks feared loss of market share to rivals and lent on property deals which were predicated on future growth levels which have now moved in the wrong direction. With the contraction in supply that is being witnessed prices cannot continue to fall once there is a regular supply of credit in the market. Banks quite simply having made mistakes in past years aimwed at maximising shareholder value are now in a position where it is difficult for them to sell any mortgages because the asset backed securities sector is closed; they in effect unable to perform their societal function for the first time in 30 plus years.
The problem here is that as the economy slows deposits will fall back and without access to international wholesale markets banks will have an ever dwindling supply to lend to anyone other than key commercial clients. By selecting very strict criteria the NTMA can secure very high quality loans at what are in the medium term very attractive prices; when the market recovers the asset class will become too expensive and they will be outbid at which time astability has clearly returned they could either hold the securities as high quality assets or liquidate the position moving the money back into index based equity or back to government paper. Critically in the short term it puts a safety net in place to ensure that the construction sector can remain open for business at say 40 – 50,000 units a year and not collapse to the 20,000 its heading for next year.