Welcome to Money Tips Daily this is Money Kelly bringing you money tips to help you save and make more money!
Yesterday, I talked about falling house prices in the UK, and some of you asked why this matters.
There are a number of aspects to consider. The recent price drop might be good news for buyers but bad news for sellers. For people who already own property the news of small fluctuations in values might not be good or bad, as they will still be sitting on an asset whether the value is increasing or decreasing.
If you own a buy to let property let to a tenant, the rent is not going to change month on month even if the value increases or decreases.
But if prices continued to fall and or there was a crash, the banks might start getting nervous and could ‘call in’ (ask for their money back) loans for borrowers who are highly geared – mortgaged up to a high loan-to-value (LTV), e.g. you owe £90,000 on a property valued at £100,000 or 90% LTV.
This happened during the last property crash in 2008 when some banks decided to ask the borrowers to repay the loan because it was too close to the value of the property based on their reassessment in light of the downturn.
In most cases, the borrower (like many I knew personally) were still making the monthly payments without any problems, but the lender had to reduce their exposure and demanded the money back.
Quite a few investors lost everything, because they could not find another lender to give the money to repay the first bank in time. Banks want to give you an umbrella when the sun is shining and trying to arrange a remortgage in 30 days during a financial crisis in not easy!
You may not be aware that mortgages can be ‘called in’, so take time to read mortgage conditions and take legal advice. Also, look for fees and early repayment charges. As always, take legal and financial advice, as this article is not designed to give you financial advice.
Some of you may be wondering what all the fuss is about on property prices or saying, “who the hell cares, what’s it got to do with me?”.
The reason is that property and house building are very important to the UK economy. The building industry employs millions of people (directly and indirectly) and the property market is a reflection of the health of the economy, especially in terms of consumer confidence.
When property prices are increasing, consumers are confident and will spend their money on stuff, which further boosts output (GDP) and creates more jobs and employment in other sectors of the economy.
Consumer confidence tends to be higher when people think, “Hey my property value has gone up by hundred thousand pounds this year, I feel great so I’m going to spend money on a new car or an extension, especially when I can borrow against my property at low interest rates”.
This consumer confidence keeps the economy moving, but too much spending can lead to overheating and higher inflation, which makes central banks nervous.
The Bank of England and the government do not like to see some new people having a good time, as later down the road the country could wake up with a bad hangover!
Another aspect to consider is that when property prices are falling builders will be less wiling to build more houses, even if the Prime Ministers tells them to do so, as they might not be able to sell them when they are completed.
Builders and developers have to do look ahead sometimes three or five years time and project whether or not the market conditions will be right to sell those properties. The government wants builders to put up houses as fast as possible or within a couple of years of obtaining planning permission, however the builder must carefully consider the financial aspects in order to make a profit and survive in the industry.
In previous property crashes in the 1980s and 1990s many developers got caught with their pants down and were stuck with thousands of properties they could not sell. This also happened in Ireland and United States. Developers went bust, banks could not their money back and some even failed.
The UK government had to bail out banks like Northern Rock and RBS during the financial crash to steady the markets.
If everyone today went to the bank and asked to withdraw their money, known as a run on the banks, they would quickly run out of cash and would close their doors. Bank lend your money out and do not not have it sitting in the vaults.
As you can see, economy is often balanced on a knife edge and everybody has to keep their nerve, especially during crisis, or it can all come crashing down like a deck of cards as happened in 2008.
During crashes, some of my friends everything, but others make a killing, snapping up bargain shares, assets and houses from motivated sellers at pennies on the pound.
We are not in that situation today. I think we all know that over the long term property rises in value and has been a great investment for centuries.
Many of the wealthiest people on the Sunday Times Rich list have either made their money in property or invest in property to shelter their capital. There are many more property investors who keep a low profile and prefer not to appear in these rich list!
Staying on the property theme, tomorrow, I’ll give you my number one reason why I believe property is a superior investment compared to almost every other form of investment.
Finally, commenting on women in business on international women’s day, Dr Liam Fox, Secretary of State for International Trade and President of the Board of Trade since 2016, told an audience on BBC Question Time that women in developing nations need more help to set up e-commerce businesses.
He added, “four out of five off-line physical businesses are owned by men, whereas four out of five online e-commerce businesses are owned by women”.