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October 29, 2012 11:22 pm
The collapse in commercial property values as the financial crisis set in was, unusually, not preceded by a construction boom and there are signs that the collapse may be soon be coming to an end, according to a member of the nation’s rates-setting panel.
Ben Broadbent, an independent member of the Bank of England’s Monetary Policy Committee, noted that unlike many other economies that experienced a collapse in property values since the crisis began in 2007, the UK did not experience a construction boom anything like that seen before previous recessions in the 1980’s or the 1990’s.
In remarks prepared for an address at Lancaster University, Mr Broadbent characterised the UK in recent years as having undergone a “boomless bust”, in which the two main drivers were the availability of credit and falling productivity in the construction industry, rather than an oversupply in the years before.
One explanation for the fact that UK construction output remains 18 per cent below its last cyclical peak cannot be blamed on a lack of public sector investment. Indeed, the public sector contribution to construction output actually rose, in line with government policy and it was the decline in private sector demand – at one point nearly 30 per cent below its previous cyclical high – that is dragging the industry down.
Instead, what drove commercial property values before the crisis was not a construction boom but the availability of credit; the ratio of commercial property loans to GDP roughly doubled in the peak years between 2005 and 2008. Some 90 per cent of all UK non-financial sector lending is secured on commercial and residential property.
What is now weighing on real estate values is not the lack of demand caused by overbuilding in the peak years. Instead, Mr Broadbent said, it is the lack of availability of credit for commercial and residential real estate that is weighing on property values. “Since 2008, it is the supply not the demand for mortgage debt that is driving activity in the housing market,” he said.
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