Credit crunch – who suffers?

Property investors, personal savers and home buyers alike may be wondering what the future holds in the wake of the credit crunch that has hit Britain’s banks. The spectacle of Northern Rock having to approach the Bank of England as lender of the last resort and then seeing thousands of its worried customers queuing outside to withdraw their savings left many wondering how bad things would get. Other de-mutualised institutions such as Alliance & Leicester – which had to deny that it had joined Northern Rock in seeking central bank aid – and Bradford & Bingley came under pressure as share prices fell and speculation mounted.

It may be a no-brainer to say that sub-prime mortgages are a dead duck just now, but some will ask what the wider mortgage market implications will be.

According to Bernard Clarke of the Council of Mortgage Lenders (CML), the one group which will not suffer are first-time buyers. Noting that for prime mortgages the only adjustments made have been “very modest”, around 0.1 or 0.2 per cent, he said: “I don’t think it’s been made significantly more difficult for first-time buyers.”

Mr Clarke added that the real problem for first-timers was the same one it had been for the past few years: “first-time buyers have had affordability problems for a considerable period of time. Those have been driven by the rise of property prices relative to incomes, and that’s much more significant for affordability,” he said.

If first-time buyers are reckoned to be no worse off than they already are, at least in the view of the CML, there are those who claim that the situation spells trouble for the buy-to-let market.

David Smith, head of investment analysis at Citywire, wrote today that he feared “the writing is on the wall” for buy-to-let on the basis that “with the recent turmoil in markets, 2008 bonuses may provide less support for the buy-to-let business and indeed the UK economy as a whole might take a step backwards”.

However, such an analysis does depend on those words – “may” and “might”. What Mr Smith is speculating about is a worst-case scenario, of which a few have been advanced in recent days. These includeformer US Federal Reserve chairman Alan Greenspan’s comments to the Financial Times that the UK may face a major housing downturn and the prediction by Liberal Democrat treasury spokesman Vince Cable that bust is inevitable on the historical grounds that it always follows boom.

Yet such pessimism may not be justified at all. Bernard Clarke and the CML are unsure in any case just how long or severe the credit crunch may be. He said: “I don’t think one can be sure [what the impact will be] as we don’t know how long the current funding problems will persist,” adding that “I don’t think anyone can say with certainty” whether the crisis will be over by the end of this year or run into next year.

Besides these considerations, there remains the fact that other economic factors may be much more positive. While David Smith might talk about the economy taking “a step backwards”, the fact that consumer prices index inflation fell again in August may have opened up the prospect of an interest rate cut. Royal Bank of Scotland economist Ross Walker told Reuters this week: “A bank rate cut is a question of when, not if.” Such an eventuality would mean lower mortgage rates and could give the economy the boost it needs if it does start to slow.

Besides all that, the average buy-to-let investor has a much sounder investment than some may imagine and thus will not be vulnerable to the credit crunch, Malcolm Harrison, spokesman for the Association of Residential Letting Agents noted earlier this week. He said: “Most buy-to-let investors, new or experienced, actually go to mortgage lenders with a well-thought out proposition, and that proposition generally includes quite a high deposit and conservative expectations of the rental value.”

Mr Harrison’s confidence provides a contrast with the position of the more downbeat views expressed this week. The credit crunch has certainly hurt Northern Rock and may hurt a few lenders, but it is far less certain that, in the short or long term, buy-to-let investors, prime market house buyers or the economy at large will suffer.