Mortgage market: The year gone by and the year ahead

How do you start to sum up 2008? There is no doubt that our grandchildren will be taught that 2008 was one of the defining moments in world economic history. They will learn about the South Sea bubble, the Wall Street crash, the dot com debacle and the great credit crunch of 2008.

This has been a year in which financial losses have been counted in their trillions. It has been a year in which mighty financial institutions such as Merrill Lynch, Lehman Brothers and the Halifax (to name just a few) all reached the end of the road and have either been closed down or consumed by other organisations. It has also been a year in which the British government effectively nationalised parts of the banking system. Who would have thought such a thing was possible? I bet Gordon Brown didn’t!

At the individual level, 2008 has also been a year in which unemployment started to rear its ugly head once again. Most economists are predicting that unemployment will hit 2 million by the end of this year and will rise to 2.5 million by the end of 2009. So far, more than 47,000 of those job losses have been in the financial services sector and, regrettably, there will inevitably be more to come.

Housing slump

The UK housing market has slumped spectacularly, with the average homeowner seeing the value of their property fall by £27,000 in the past year (which is a huge amount, when you consider that the average national salary is just £24,000, according to the Office for National Statistics. However, for homeowners with no intention of moving, this simply means that their properties have not increased in value by quite as much as they thought they had, over the past few years. If they don’t move, they don’t actually make a loss). Industry experts are forecasting that house prices will fall by approximately 25-30 per cent from peak to trough.

Almost every sector of the economy is now reporting a slowdown including construction, retail, travel, hospitality and even internet trading. The only business which appears to have been able to buck the trend in a spectacular fashion is Shell, which made an eye-watering £3 million an hour throughout the summer months!

However, simply reeling off a series of mind-boggling numbers is not the best way to sum up a year which has been a rollercoaster ride for everyone. I’ve thought about various ways of going about this task, from analysing great sporting moment (it was, after all, a wonderfully successful year for our Olympic team and for Lewis Hamilton), to tracking notable moment in British culture, such as Jonathan Ross being banned from the BBC for 3 months! But then I hit on the perfect solution: have a look at the way in which the news stories have unfolded in Commercial Finance Introducer magazine [oh no! – ed]!

The New Year heralded in a new look Commercial Finance introducer magazine. Smiling joyfully from the opening page of the New Year issue, the editor, Nia Williams, pointed out that 2008 could be a good time for residential brokers to consider extending into the commercial mortgage market. In the news pages, my own business – Base Commercial Mortgages – underpinned Nia’s optimistic message, by predicting that 2008 would be the year in which specialist commercial mortgage brokers would come to the fore, as an increasing number of businesses struggled to find finance themselves because of the more onerous lending terms being offered by lenders. Little did we know at that stage, just how tough the year was going to become.

In the March issue the message was still an optimistic one, with brokers being encouraged to build their knowledge base. However, one of the lead news stories hinted at what was to come: ‘Commercial lenders expect debt conditions to deteriorate further’ it proclaimed and went on to point out that ‘Two-thirds of commercial banks expect the credit crunch to have a worsening effect on the sector’.


By April, those deteriorating debt conditions resulted in the first major commercial lending casualty of the credit crunch: sadly, Commercial First had no option but to suspend all new lending, as it faced difficulties renewing its credit facilities. Base also had to halt new broker registrations, primarily to help control the inflows of new business, which had started to spike as other lenders withdrew facilities and tightened criteria. However, some in the industry remained upbeat. Rob Martin, head of analysis and research at Legal & General, said that he expected total returns on property to turn positive again in the second half of 2008. If only he had been correct.

In the July issue, Nia, continuing to grin broadly on the editorial page, told brokers: ‘Don’t be daunted. Providers are keen to help you maintain and grow your business.’ She also pointed out that an increasing number of brokers were taking the IFS's Certificate in Commercial mortgages and encouraged more brokers to follow suit. Lloyds bank also reported that optimism amongst British businesses was growing, with many expecting trading conditions to improve over the next 12 months. However, at this stage manufacturing industry was still holding up well, helped by a weak pound and strong exports.

In the August issue Nia’s broad grin on the editorial page had changed to a more tight-lipped smile – she must have known what we were all in for! The same issue also reported a research study which showed that brokers were confused about the future prospects for the commercial lending sector. On the one hand, the research said that 40 per cent of IFAs expected the UK commercial property market to begin recovering this year. However, 42 per cent were more realistic, and said it would be 2009 before we saw any signs of an upturn. Even more confusingly, 10 per cent of brokers said the recovery was already underway, whilst a further 10 per cent said that it wouldn’t happen until 2010.

Fading optimism

In the September issue, Nia’s opening remarks summed up the situation very well: “The commercial sector is following in the footsteps of the residential market”. She went on to point out that “It is very hard to find some good news in the market at the moment with various research showing that brokers are more pessimistic about the sector and business confidence is down generally.” As the summer sun started to fade, so did optimism for the future.

By the time the November issue was published, the market was reeling from the international financial hiatus which had taken place in October. The Government ploughed billions into propping up leading financial institutions, the Bank of England cut base rate and the tell tale signs of worse time to come became all too visible; rising arrears and possessions and job loss statistics starting to soar. Brokers and lenders are no longer viewing the market through rose-tinted glasses; everyone recognises that the year ahead is going to be tough.

As the year comes to a close, the big question is just how tough is 2009 going to be? Many so called economic experts are saying that it will be 2010 before we see sustained signs of recovery, but experts have an impressive track-record of getting it wrong!

Sharp shock

On the other hand, other pundits are saying that we are in for a short, sharp correction and the economy could recover at a faster pace than many people are predicting. They argue that because this recession has been caused by a lack of funding rather than a slump in demand, that when funding does come back on line then the pent-up demand will ensure a speedy return to normal. Indeed, it has been argued that what we tend to see in such circumstances is an over-correction at each end of the economic cycle, with the very rapid slowdown we are currently experiencing being mirrored by an equally rapid upturn, which can tend to cause problems of its own. For example, if we see interest rates fall at low as 2 per cent or even lower, as some believe it will, then this could encourage people to over-borrow once again in the future.

At a time when most businesses would be happy to settle for a period of stability, it could be that we are in for a continued period of volatility, with trading conditions and the stock markets continuing to lurch from one extreme to the other. This would be the worst possible outcome, as it makes planning and resource management an almost impossible task.

What do I think is going to happen in 2009 and beyond? I’m no economist so my guess is no more valid than anybody else’s and all I can do is base my judgement on what I see happening as a businessman.

It’s my belief that it will be 2010 before we see signs of a sustained upturn. It isn’t just the UK economy which is now in recession, but most economies of the developed world. We therefore cannot rely on our ability to trade our way out of problems. My other concern is that despite the government’s recent intervention, businesses are still being starved of essential working capital. As long as banks remain nervous about lending, businesses are going to struggle to make headway. I do agree that deep rate cuts will help, but only if funding is made more available than it is at the moment. Let’s hope that the government is able to apply pressure to the banks to provide greater support to businesses, particularly small businesses.

Rock bottom

The commercial property market is close to reaching the low point in its cycle but, arguably, has not quite reached the bottom yet. However, this is a time for taking a long-term view. Britain is a trading nation and we will always have a strong base of businesses which need premises from which to operate. The market will return; the only question is when?

Commercial finance brokers are therefore in for approximately 18 months of very challenging conditions, if my prediction is correct. However, professional and experienced commercial finance brokers are worth their weight in gold to businesses seeking finance at the moment. Agreed, cases are going to be tougher to find and tougher to take through to completion, but there is still business to be done. As I have said in previous articles, this is a time for brokers to get close to lenders and really understand their needs and how to submit cases in order to give them the best possible chance of success. Brokers also need to capitalise on every opportunity to increase income by selling ancillary services such as insurance, as well as being willing to investigate potential new markets.

We all know that 2009 is going to be a challenging year, but I also know that there are plenty of commercial finance brokers who are up for a challenge. We’re also up for the challenge at Base Commercial Mortgages and are working hard to resume lending as soon as possible. A big thank you to all the brokers who have given us their continued support. Let’s hope for a speedy recovery and return to more buoyant trading conditions as soon as possible.