Assetz® News - In one Sentance: Not so bad at all

In one Sentance: Not so bad at all

25th September 2008 |

Through the last few months, as the credit crunch has persisted and one bad news item has followed another, many will have feared that the UK is heading inexorably towards a recession and with it the kind of property crash that occurred in the early 1990s.

Of course, many will point out that some differences exist between now and then, not least that UK interest rates were much higher until September 1992, kept there by the government's commitment to keeping the exchange rate between sterling and the German mark within the agreed parameters under Britain's Exchange Rate Mechanism (ERM) membership terms. Only after 'Black Thursday', when Britain suspended its ERM membership, was it possible for rates to be cut.

Some may argue that this period after the withdrawal was only bad for the government in terms of the political damage it suffered, whereas the economy and housing market gradually recovered, allowing Labour to inherit a far healthier scenario.

But the credit crunch, it seems, may have posed other problems, namely those of a financial crisis so deep even Lehman Brothers, an institution that emerged unscathed for 158 years through various crises (even 1929) has fallen. With responsibility for rates delegated to the Bank of England's monetary policy committee (MPC), this band of men and women have the job of making sense of what will happen next and what - if much at all - they can do about it.

However, for those wondering if investing in property is a good move - even with the long term in mind - it appears that at least one of the nine members of the MPC is sure things will not be half as bad now as in the early 1990s.

Speaking at an event in Leicester yesterday, Tim Sentence suggested those who take a long-term view can be cautiously optimistic about events a year hence.

He said: "Evidence suggests that the economy could start to contract in the second half of this year or in early 2009, giving us one or more quarters of negative growth over this period."

This may not have come as startling news to his audience, but Mr Sentence followed this by predicting the negative period would be "much milder" than previous ones and also shorter. Next year will be characterised, he suggested, by quarters of either very slight decline or very slight growth.

Mr Sentence added: "In the second half of next year we should see a gradual recovery, as the spike in inflation would be behind us and the growth of real incomes should resume, stimulating consumer spending.

"The main impact of the credit crunch should also be fading by the second half of next year, creating a more positive backdrop for business and consumer confidence."

While adding the caveat that more "shocks" could occur, this upbeat view could suggest to investors in property that the next year will provide a good chance to buy when the market is low, with better times to come beyond.

That a recession may happen may seem more plausible than ever today after news emerged that Ireland has now had two successive quarters of negative growth, the once proud Celtic tiger now not even getting a dead cat's bounce. Ireland's own downturn has seen a large drop in house prices, but the fact that it has gone into recession before any other eurozone country may suggest it has deeper problems than the rest. For investors in British property, who may among other things benefit from cuts to base rates in an economy free this time from European shackles, things may be nowhere near as bad.