A new property price alarm system has been introduced, aiming to provide a warning about a possible new financial crisis, Citywire Money reported in November 2017.
The alarm system developed by the Property Industry Alliance (PIA), sounds a warning when commercial property prices rise too high. Commercial mortgage lenders and regulators can then decide whether to act on this information.
According to historical evidence, when property prices rise too high, this is followed by a price crash. This results in investors being unable to sell properties at a profit, and affects their ability to repay loans.
The all property index shows that after taking inflation into account, property prices are now 10% above the long-term average. According to previous financial cycles, after prices reach 20% above average, they have fallen by around 30%.
Rupert Clarke, chair of the PIA’s debt group, said that lenders should take more care when the alarm system is at its amber level, and take action should it hit the red level.
“At the moment, the vast majority of lenders have no clear action plans to prevent themselves from being sucked into the commercial real estate lending ‘blackhole’; lending too much against overvalued properties at the end of the cycle.”
Clarke added that the system was a scientific alarm that can prevent lenders over-extending themselves in a property boom, then struggling to lend after a property price crash. If too many lenders over extend themselves, Clarke warned that this could start a new financial crisis.