Prices of UK property are in a very interesting shape. People have always been in love with UK property which has traditionally been a parking lot for the ill-gotten money stashed in poor countries and then transferred to Britain through property investment. Credit-crunch triggered recession witnessed marked slump in the market which has no signs of going away even when the economy is recovering. Thanks to British Government’s recent budgetary measures, property prices are expected to fall further by 5% this year and will keep falling @ 10% per annum during next two years. Those interested in buying UK property, including Rockwood Estate, should wait for another two years. This wait will be well-rewarded and buyers could get the deal of their lifetime.
According to a report appearing in the Daily Telegraph, economists predict collapse in house prices of 23% from the start of 2010 – a deeper drop than the 19.3% crash during the recession. The numbers imply a torrid second half of 2010 as house prices are currently 3% higher than the start of the year according to Nationwide Building Society.
“Higher taxes, spending cuts and rising unemployment all point to fresh house price falls this year and next,” the forecasters said in a report. “The benefits of low interest rates will be undermined by a fresh tightening in mortgage lending criteria.” It is the second report in less than a week to make grim reading for Britain’s homeowners. PwC warned “there is a 70% chance that UK house prices will still be below peak 2007 levels in 2015 in real terms … and that real house prices [after inflation] may not regain their previous peak levels until around 2020”.
Average house prices peaked at around £187,000 in October 2007 before collapsing for 16 months consecutively, according to Nationwide. The subsequent recovery has left them at £170,111 – 9% below the top of the boom. Capital Economics justified its outlook by noting that the house price-to-earnings ratio is still far above its 4% long-run average at 5.5%, and stressing that mortgage rates will only get more expensive. It expects “London to be hardest hit by the second leg of the correction”. However, it cautioned that the 2012 forecast “is highly uncertain”.
The firm’s prognosis is based on considerably worse outlook for the economy than the Treasury’s. Capital Economics expects the economy to grow just 1% this year, 1.5% next and 2% in 2012, against official forecasts of 1.2%, 2.3% and 2.8%. Unemployment, it added, will rise to 3m after 750,000 public sector job cuts against the official forecasts that unemployment has peaked despite a looming 500,000 civil service cuts.
The average price of a UK home fell 0.5% to £169,347 in July, according to the latest figures from Nationwide Building Society released on Thursday. This month’s fall comes after prices stalled in June, and leaves them just 6.6% higher than they were a year ago. A combination of record low interest rates and far less unemployment than feared has helped prices rebound after slumping for 18 months in the wake of the credit crisis. However, Nationwide today suggested that the balance between buyers and sellers, which has also helped buoy prices, may be changing as the number of potential buyers dwindle.
For most people, it is simple bricks and mortar that matter most – the value of your home. Research by Savills, the estate agents, has forecast an inflation-adjusted rise of 40% in house prices over the next decade. Sounds good, but that is well below the 67% spike between 2000-2007, the 43% rise in the 1980s and the 49% rise in the 1970s. Another worrying trend that experts warn about is the split, which could be permanent, between those who have equity in their homes, having been on the properly ladder for years, and those who do not. Over the past 10 years the size of a deposit for a first-time buyer has risen from being roughly equivalent to 20% of their average income in 2000, to almost 100% today, making buying homes increasingly difficult for young people. If they cannot generate any equity then getting started, never mind trading up, is impossible.
But it is not just first-time buyers who are going to face problems in future. “We have seen plenty of cycles [over the past 50 years], there’s nothing new about that,” says Martin Ellis, head of housing economics at Halifax. “But what is new is the scale of the credit crunch, its impact and the fallout.”
The biggest change has been an end to easy credit from mortgage lenders, which was a big factor behind the most recent house-price boom. Banks are cautious about lending as they look to protect capital ratios, shore up balance sheets, maintain profits and avoid bad debts.
“There are going to be two or three tiers in the market,” says Ian Marris, a partner at Knight Frank. “The northern cities, for example, have been dependent on Government money. There’s simply not going to be the wealth to support anywhere near the sort of growth we have seen.”
Another difference this time round is an increase in flats, snapped up by buy-to-let investors before the market caved in. From 2000 to 2008, the proportion of newly-built homes that were flats rose from just over 15% to almost 50%. In contrast, detached housing fell from 45% to less than 15%. This trend increased the supply of new homes and meant that over the past 10 years, old houses grew in value more than new houses. With so many new flats on the market, prices could be depressed for some time, although that could help affordability, assuming buyers can actually get a mortgage.
One of the strange trends in recent years, however, has been the lack of pain that homeowners have suffered since the housing market peaked in the spring of 2007. Where are the repossessions, so common in previous property busts which brought misery to communities across the nation? In 1991, more than 75,000 homes were repossessed, followed by 68,000 in 1992. The highest figure in this downturn has been 46,000 in 2009.
The answer lies with the near-zero cost of money being stubbornly maintained by the Bank of England’s Monetary Policy Committee. The official Bank rate is just 0.5% and has been since March 2009, keeping many people afloat artificially. Experts such as Ed Stansfield, chief property economist at Capital Economics, reckon this loose monetary policy is distorting the residential property market. “In previous recessions, people would have struggled to keep up with repayments. But here they are managing to keep up and one of the big drivers in the past in pushing house prices down has been distressed sales,” he said. The market, he believes, is “without equilibrium”, with prices out of kilter with the wider economic climate. They are too high, in other words, and a fall is a clear risk especially once interest rates start to rise again, as they inevitably must do.
While some residential homeowners are still sitting on huge profits accumulated over decades, the chances of having made a killing in the commercial property market have proved rather more elusive. According to IPD, the leading commercial property-price index, the real value of property has fallen by 55% over the past half-century. Within that, industrial and retail assets have performed the best, with office blocks falling the most, even though that sector often attracts the biggest deals.
Ian Coull, chief executive of FTSE 100 industrial property group Segro, says there is a rational explanation for the trend. “Why should it do any more? We are able to match supply with demand and if there is a shortfall all we do is build more and keep pace with inflation.”
Surprisingly, property in the City of London, which along with the West End, attracts the most investment, has also underperformed. Since 1987, prime capital values in the City have slipped from £2,500 per sq ft to around £1,000, according to CB Richard Ellis. The West End has risen from £1,000 per sq ft to £2,000 per sq ft. There is another reason why residential property has performed better than commercial. According to Francis Salway, chief executive of Land Securities, the difference is in the greater difficulty developers face in building new homes than in putting up another office block. “The UK is one of the tightest places for housing,” he says. “Also, an increasing proportion of GDP has gone into salaries and therefore poured into property.”
Of course, it’s not all doom and gloom in commercial property. If you are smart, you can get rich. “Property is not a long-term hold, it is a trading asset,” says Chris Northam, of Jones Lang LaSalle. “If you get it right, you can make a fortune.” And over the years many people have made many fortunes and, if they were smart, managed to avoid the worst falls which have happened in the 1970s, the early 1990s, and since 2007.
Patrick Vaughan and Raymond Mould, business partners who met in the 1960s, have earned a reputation as kings of calling the property cycle. With London & Stamford they are now on their third venture. They sold Arlington and retail-park developer Pillar just before previous market crashes. The pair went into the 1970s downturn with cash, a period Vaughan describes as a “very messy market”. He adds: “A lot of money [in the property market] came from fringe banks that were allowed to crash.”
In contrast, the collapse in values in the early 1990s was linked to overdevelopment, as a string of new projects reached the market, such as Broadgate in the City of London. With this influx of new space, rental values and capital values crashed as the economy slowed down.
The fall between 2007 and 2009, which saw values drop 44%, was a double-whammy caused by a lack of capital due to the banking crisis, and rental income falling as the recession damaged business demand for new space.
Lessons learned from the previous two falls suggest that values now face a period of stalling growth as banks look to reduce their exposure to the sector amid economy fragility and uncertain consumer spending. For those willing to play a waiting game, however, there could still be exciting opportunities.
Mike Slade made his first acquisition at Helical Bar in 1984. The property was bought from the National Bank of Kuwait after being held on its books for 10 years. “These assets don’t come out for three to four years,” Slade states. “I am quite confident moving forward, although the big problem in the next three to four years will be [the lack of] consumer spending.”
But the road ahead could be a slow one for those looking to invest, as banks are likely to take their time readjusting their balance sheets before being willing to back property schemes with loans. In the 1990s, according to figures from the Bank of England, it took from March 1991 to December 1997 for banks to reduce their exposure to property lending from its peak level to a low. This decade the corresponding peak was reached in July 2009. A return to boom times is obviously some way off.
There are some positives, though. The UK, and particularly London, has become increasingly popular with overseas investors and that extra demand is expected to support growth. In 2009, around three-quarters of deals in Central London were done by overseas investors, from Qatar, Germany and the US, compared to a third in 1994.
Although regulation and the rise of rival financial centres in the Far East threaten London’s status as a financial centre, the City’s long-lease lengths, relative transparency and international business community mean it should remain a safe haven for investors. London’s restrictive planning regime should further protect prices, according to Mr Salway. “Someone is always going to want to be in Mount Street or St James’s Street but you just can’t build there,” he explains.
Although we are in for a bumpy and unpredictable few years, positive long-term fundamentals in both residential and commercial property remain. The UK’s high population density and planning restrictions mean meeting demand with supply will always be difficult. Although economic growth is fragile at present, its return should keep demand bubbling away so that every Englishman, not to mention Scotsman, Welshman and Irishman, can still count his home as his castle.