In these difficult economic times, it is difficult to know where to turn. The banks have proved that they can take excessive risks based upon inadequate levels of security, potentially putting deposits at risk. Gold looked safe but could it be a bubble? Are bricks and mortar the safe way forward? Greece was technically bankrupt as a nation state that in turn threatened the entire Euro zone. The stock markets are giving investors a roller coaster experience. Can the US government get past partisan politics and face economic reality?
As ever, many people will choose to take a balanced approach if they are able to make investments in pursuit of a safer financial future. In turbulent times, putting all of your proverbial eggs into one basket can turn you into a financial basket case. Property has always been seen as a safe long-term option, but this brings challenges as well as opportunities.
Since the start of the economic crisis at the end of 2008, banks aren’t lending money as freely (or recklessly) as they once were. This means that if you are looking to buy property, the amount required as a deposit is particularly high. If you are in the fortunate position where you have sufficient cash available for a deposit, you firstly need to look for the best possible rate of interest. Financial institutions will want to identify whether the property purchase is going to be your primary or secondary residence or whether you are seeking to rent the property in the short to medium term. This in itself may have an impact upon the rate of interest that is offered.
If you have the deposit and loans sufficient enough to buy a property, you still need to consider whether this is a good investment. One of the reasons why mortgage activity is low is that property values have been static for some time.
House prices and availability of credit generally go hand in hand: credit was much more easily available when house prices were booming, and house prices were booming because credit was available. This is a classic virtuous circle.
The risk at the moment is that there is no virtuous circle: it looks more like the Catch 22 downward spiral. Banks are not lending as property prices are not rising, and property prices are not rising a there is limited credit available. We could ask if you can see the banks increasing their lending over the next few years? We can’t, and therefore feel that house prices will not rise either. Post crisis, the banks simply do not have the liquidity (or the ability to risk more losses with cheap credit).
One of the reasons for property having been a popular investment route is that people prefer to invest in something that they can see and touch, assuming that it will bring returns. But even if you are getting a return through rented property, liquidity is another aspect that you should consider. What happens if you need money in an emergency? What about medical bills if something happens to you or a family member? Property does not offer short-term (or even mid-term at present) liquidity; it can take months to find a buyer who has cash to buy the property, perhaps even years if banks still aren’t lending money! What do you do then? Get a loan and pay interest on the loan?