The term “Credit Crunch” is currently being banded around in pubs and canteens as often as it is discussed in boardrooms and on the news.  It’s being discussed in many different languages on various Continents. The property investment industry is affected just like any other.

While generally accepted to be a huge negative for business, it’s actually being blamed for just about any ugly figures found on P&L spreadsheets for Q4 2007.  Is this fair? In fact what exactly is the “Credit Crunch” and how on earth did it happen?

Firstly, in order to recover from various financial problems such as the dot com crash and 9/11, central banks make it very easy and cheap to borrow money.  The banks increase the supply of money and encourage the use of it with low interest rates, making it logical and attractive for companies, countries and consumers to borrow funds.

On the surface this looks great but of course over time it leads to a general increase in prices.  There is simply more money around and people can seemingly afford to pay more and sustain increments.  However, as this progresses, it’s clear that wages and general incomes do not grow proportionally.  As  result, companies and consumers are forced to borrow more and more money in order to keep up with the increasing prices.

A “Credit Crunch” occurs when lenders sense that there are bankruptcies and loan payment defaults on the horizon due to the unsustainable situation.  They decide to begin slowing down their lending and, where possible, retain cash.  In this scenario lending typically becomes more expensive (interest rates are raised) and logically lenders only facilitate the most secure of loans.

The growth of the economy can be largely accredited to cheap and easy access to borrowed funds previously, but now companies cannot grow at the required rates or meet targets that were created based on their borrowing.  At the same time, consumers struggle to purchase homes and other items that require finance. Homeowners who fixed their mortgage rate a few years back are finding it very tough.  The Northern Rock crisis is seen as another example of the “Credit Crunch” brought on by a general lack of liquidity.

The Crunch has been worsened by the US sub prime lending problem:  huge volumes of the US population are struggling to pay off debts and costing banks around 50bn GBP, with ramifications extending globally.

The International Property Investment Network (IPIN) and the Credit Crunch

For the property investment industry and IPIN specifically, the “Credit Crunch” has certainly created a slowdown in the number of people looking to invest in property.  It has also performed some form of “natural selection” removing many of the new, small and, in some cases, less professional companies that simply could not sustain this. 

For IPIN, January 2008 has reflected a positive change in peoples’ attitude towards property investment. We have changed our sourcing criteria to mirror current market and members´ requirements and, in so doing, look forward to a successful 2008.  When the market begins to recover, IPIN will simply adapt again on members’ behalf to find its pole position within the sector.

Further Reading :-

For an extremely insightful post on this topic I strongly suggest you read the this post from Graham Brown at the interestingly named Confessions of a Property Investor.