Nostalgia is not just for the old guys down at the pub waxing poetic about their youth. If you listen closely, plenty of real estate practitioners can be heard pining for the days of yore when property investments generated positive returns, rents moved upward in an orderly fashion, and debt — remember that? — could be secured at reasonable levels and prices.
We are now more than 18 months into the global credit crunch and the fundamental problems remain with us. Commercial banks, unable to assess each other’s exposure to, and the open market value of, debt instruments secured on falling house prices, have withdrawn from the credit markets. In September 2008, the credit crunch increased in severity as the collapse of Lehman Bros raised concerns about bank counterparty risk and the adequacy of bank capital.
A recent headline in the Financial Times, echoed in many other publications, optimistically read “Hope Based on Interest Rate Cuts”. What is it that we are hoping for? Is it a recovery, improved investment returns or simply a return to an environment that we can understand and feel comfortable in? Put simply, are we hoping for a return to “normality”?
Rating agencies appear to have played a leading role in the current crisis that the real estate market in the United Kingdom finds itself in by overestimating the credit risk of property-backed debt instruments. The public should be able to expect — and to be protected by — the objective exercise of professional judgement by a responsible and regulated group, and the rating agencies failed in this regard. Did valuers also contribute to the crisis, by failing to discourage banks from lending high proportions of the ramped price of property, and by overestimating the value of property assets and property funds?