Recent newsflow from the UK housing market has become much less negative in the last few months, leading some commentators to speculate that the market has already reached the bottom. In this piece we examine the latest evidence and look at future developments that will shape the property market going forward. There are investment opportunities out there, if one knows where to look...
When the global financial system imploded last year, the media crowed that arrogant and overpaid bankers would get their overdue comeuppance and that the Anglo-Saxon "casino" and "credit bubble" economies would suffer disproportionately in the downturn. The moralisers said that it was only right and just that those who revelled most at the party during the credit spree would be the ones nursing the worst hangovers. However it didn’t pan out that way. As the global crisis has unwound the victims have been innocent bystanders who did not even attend the party. The collapse in trade finance has hit exporters in Germany and Japan hardest, while economies with sophisticated financial centres have been less harmed. The latest OECD forecast sees output falling by 6.1% in Germany and by 6.8% in Japan this year, while projected output falls in the UK, US and Switzerland are more modest at 4.3%, 2.8% and 2.7% respectively.
A similar pattern is being played out in the UK property market. Many commentators believed that the near death experience of the financial system would be catastrophic for the high end of the property market as the hedge fund industry was ravaged by redemptions and leveraged private equity operators were stymied by a contraction of credit. But the script hasn’t worked that way. There are signs of life at the top end of the London property market as talk of bonuses is back on the agenda.
Last month estate agents reported a pick up in acquisitions of prime homes and weekend country retreats by hedge fund managers and the like. The £10m plus sector of the market saw values rise by 1.9% in June, while £1m plus properties rose 1.7% in June, to record the third successive monthly rise. Indeed in the second quarter central London £1m plus properties rose by 3.7%. Are the green shoots in the prime prestigious property market an encouraging omen for the rest of the property market?
Property: Asset or commodity?
The answer is not necessarily, because the UK prime end of the market behaves more like a commodity than a place to live. Let me explain. For most of us the primary purpose of a house is a roof over our head. In areas where land is plentiful like Nebraska or Idaho, there is usually not much to choose between the prestige and convenience of different districts in spacious cities. In such areas house prices are linked to the nature of the accommodation rather than its location. Accordingly house prices tend to be affordable, stable and tend to move in line with income. Now let’s consider the UK, where land is not plentiful, increasingly location is the prime determinant of value. For example if you moved a mews property from Belgravia to Paisley in Scotland it would lose most of its value. It follows that the prices of properties in prestigious areas resemble a commodity in short supply. In recent months there has been a scramble for real assets as a protection against the inflationary consequences of printing money, there has been heightened demand for gold and the increase in demand for prestigious property for similar reasons. Furthermore it is no surprise that the prices of Government IOUs have been going in the other direction.
So we see the pick up in the London prime property market as a real asset investment play rather than a precursor to the pick up in the housing market generally.
Making sense of the deluge of data
The outlook for UK property in general is more clouded than usual by a number of factors: historically low interest rates, tight credit conditions, rising unemployment and low activity. The picture is complicated by the plethora of housing market data that make the headlines on an almost daily basis. Estate agents Rightmove and Hometrack issue monthly house price numbers, as do leading mortgage providers Nationwide and Halifax, further the UK Land Registry also supplies monthly data. Hometrack’s data are based on estate agents’ opinions on the achievable selling price for standard property types. The Rightmove numbers reflect a survey of estate agent asking prices. Nationwide and Halifax figures are based on mortgage approvals at Nationwide and HBOS respectively, while UK Land Registry data are compiled on all residential property completions in the UK. The Land Registry figures are the most accurate and comprehensive, in particular they pick up cash sales which are increasingly important proportion of purchases, but alas Land Registry data are the least forward looking. On the other hand the Hometrack and Rightmove indices are based on estate agent opinions and aspirations, which are less concrete but potentially more forward looking. All these series measure different things so it’s not surprising that the monthly figures differ so markedly. See table below.
Monthly change in UK house prices
|
Survey |
April 2009 |
May 2009 |
June 2009 |
|
Hometrack |
-0.3% |
unchanged |
unchanged |
|
Rightmove |
+1.8% |
+2.4% |
-0.4% |
|
Nationwide |
-0.3% |
+1.3% |
+0.9% |
|
Halifax |
-1.8% |
+2.6% |
-0.5 |
|
Land Registry |
-0.3% |
-0.2% |
N/A |
Nevertheless these numbers are much more encouraging than the diet of unremittingly bad house price news we had become accustomed to. For example, from June 2008 to February 2009, the average monthly decline in the Nationwide house price index was over 1.5%. And although the monthly data from different sources does not seem to correspond, taken together they broadly tell the same story: that house prices, after steep declines, are levelling off. The best description for the mainstream housing market right now is that declines are, for the moment, being cushioned.
Improved sentiment - but have we reached the bottom?
The better recent monthly data has improved sentiment among forecasters too. Back in March a poll of 35 analysts forecast an average fall in house prices this year of 14%, coming on top of a 16% decline in 2008, pundits were also projecting a fall of 4% in 2010. Now these same analysts see a total decline of 8% in 2009 and a flat performance in 2010.
Going forward there are some factors supporting and a number of factors undermining house price values. On the supportive side, official interest rates are expected to stay low for certainly for the next 12 months if not longer.. At the same time the ratio of house prices to earnings- a key guide to affordability of housing - has fallen to 4.36 in May this year, a level not seen since January 2003. The gap between asking and selling prices for homes has narrowed. According to Hometrack in January the eventual sales price was 88.3% of the original asking price, now the figure is 91.0%.At the same time the average time a property is on the market has fallen from 12.3 weeks in January to 9.4 weeks in June. These numbers are consistent with a stabilising housing market but the worrying point is that the figures are based on an unusually low level of transactions and little interest from first time buyers.
First time buyers are the lifeblood of a thriving housing market
Indeed, the long-term prospects for the housing market are being held back by the dearth of first time buyers. At the moment, the market is being propped up by cash and equity-rich buyers and as such the level of transactions is very low by historical standards. New entrants to the housing market typically have to stump a deposit of 25% of the purchase price and mortgages available, as a multiple of borrower’s income, continue to fall. Furthermore the recent hardening of government borrowing costs has pushed up the cost of fixed rate mortgages. Rising unemployment and the spectre of job losses in the future is also deterring new entrants to the housing market. First time buyers are the lifeblood of a thriving housing market.
So although sentiment in the housing market has improved in the last three months, it is difficult to see enough new entrants coming through in the next twelve months to provide the basis for a sustained recovery in prices. Accordingly we see further moderate house price falls this year with the market remaining in the doldrums in 2010. It follows that we, as home owners, have to live longer with the fall-out from the credit crisis than its architects. As in the case of economies in general, those who took the most from the punchbowl of cheap credit will not necessarily have the longest hangovers.
In conclusion, despite the more encouraging data after the last few months, the low level of transactions and absence of significant first time buyer interest suggests that the UK property market has not yet bottomed. It follows that it is still premature to bargain hunt in the bombed out housebuilding sector. But there is an investment opportunity that chimes with our ongoing investment theme that real assets will thrive in the long run as overborrowed governments resort to the printing presses. The resurgence of prime London properties is consistent with the scramble to secure real, commodity style assets as a defence against future inflation. Prime estate agent Savills, which was on our "Tory Watch List" last month, is well placed to benefit from the upturn in activity and valuations in the prime sector of the UK property market.
Article first published on 11/07/2009
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