The Great Property Debate

More in due course from The Great Housing Debate, an annual event organised by John Wriglesworth and which was held last week in London. The panelists included, Michael Coogan, Director General of CML; Evan Davis, Economics Editor of BBC; Richard Donnell, Director of Research of Hometrack; Fionnuala Earley, Chief Economist of Nationwide; and David Miles, Managing Director of Morgan Stanley.

It is hard to put into words the frustration felt by the minority of agents present at the waffle coming from the panel who refused to actually debate (they all agreed with each other), they seemed oblivious to what was going on in the real world and one in particular, Fionnuala Earley from the Nationwide who was happy to maintain her predictions of a modest rise in 2008. (Expect an embarrassing climb down any day saying that perhaps they had been a little optimistic. Yer Fionnuala, right!)

Stuart Law bravely sought to provoke by suggesting the unimaginable – that prices would actually rise 5% this year but few attendees will have learned anything and most will have missed the chance to fleetingly visit the real world, to speak to guests from the planet Earth and to hear what is really happening. David Miles, chief economist at Morgan Stanley illustrated how in touch most of the panel were when he said that “house falls will have as many gainers as losers”. I’m not sure David but I suspect that there are more home owners, each of whom will lose than there are first time buyers who you think might gain from cheaper property!

I’m SO annoyed by this wasted opportunity that I’d like to end Lent with a less than Christian reminder of what happened when another bunch of property experts (and myself!) were asked at the MoneyWeek round table last October where house prices would be in 12 months time? Smug? Moi?

A flight to quality

Following the recent collapse of Bear Stearns, activity in the financial markets will have a large bearing on the housing market over the coming weeks. To date, despite difficult economic conditions, the prime London and country markets in which Garrington operates have demonstrated a good degree of resolve. It is the sub-£1Mil mainstream market where the effects of the credit crunch have been felt. The fundamentals which support the top end remain in reasonable shape, but there is a danger that further bad news from the financial world could tip the balance of confidence.

Easter is always a poignant moment for the housing market, I expect that this year it will be particularly so. There are lots of potential buyers and sellers out there who have been perched, watching and waiting for the last six months. These are people who need, or at the very least would ideally like to move, but for whatever reason have not implemented their plans. Although I acknowledge people always love an excuse not to go house hunting, quite what it is that they wait for I’m never entirely sure. Activity levels have decreased as a result of this mindset. Easter was D-day. Either these spectators will now decide to come out to play, or commit to staying where they are for another year. It always surprises me when the market softens that so many people trading upwards fail to see a potential drop in price as a relative one, which can be more than recouped by purchasing under similar conditions. But that is precisely what ‘sentiment’ is all about and the reason why it affects activity to such a great extent. Needless to say, the Bear Stearns news from across the pond could not have come at a worse moment!

By its very classification, the prime sector is inhabited by people of good credit rating who tend to apply for smaller ratios in terms of loan value and has therefore been largely unaffected by the credit crunch or the reduction in available mortgage products. If our own experiences are anything to go by, Garrington currently has a far higher value and greater number of retained search business than at the same time twelve months ago. Our deal numbers are also up and sensible prices are being negotiated in London where supply has been improving; but the lack of choice of quality product across the home counties, south west, north west and particularly in the eastern regions is proving challenging for all concerned. It is of course this very same lack of choice which has been underpinning values so effectively.

Post Easter it now remains to be seen whether the slowdown becomes more entrenched, or whether the market gets a spring in its step as we head into that time of year. Will there be a greater number of sellers who panic and rush to sell, so increasing supply? Or will it be buyers who decide to plough ahead in the reluctant acceptance they can’t wait any longer? Or might it be that everybody feels that enough is enough and either withdraws altogether, or that both sides come out to the centre spot for a kick off? Whatever the outcome, Garrington will be monitoring the situation extremely closely.

There are risks and what is sure to happen is that just as everyone is repricing risk in the financial markets – so they will try to do so in the property markets. There is a natural flight to quality in these periods which means anything less than perfect will be the first to suffer.
PHIL SPENCER
Chief Executive
28th March 2008
www.garrington.co.uk

No slow down at the top of the market

No one seems to have told the rich that there is a housing recession. Homes under £300,000 are proving particually hard to sell at present as nervous buyers find it impossible to get the kind of mortgage offers that were being thrust at them last year. But it looks like properties over £3m are selling like hot cakes!

Looking at the statistics, sales of cheaper houses have collapsed. Figures from the Land Registry due out next week are expected to show that the volume of sales across the market has fallen by over 25% but at the lower end this is could be more than 30% year-on-year. Estate agents are under huge pressures as not only has the volume of new property coming onto the market fallen by a third so far this year but the number of properties going under offer has shrunk too. 

At the top end of the market there are equally few new properties coming onto the market but those special few are being fought over like the first day of the January sales. One of the most recent examples quoted by the BBC is Duntisbourne House, a gem of a house with lodge and flat and 70 acres in Gloucestershire which has been cleverly marketed by Strutt & Parker with a guide price of £5m. Over 70 people are reported to have viewed the property and a sale north of £8.5m is understood to have been agreed. 

At the top end of the market buyers with £5m – £10m to spend on a house aren’t spending all they have and almost certainly aren’t dependant on a traditional mortgage. They are typically worth £30m and are looking at buying a home for the next ten to twenty years. When they see the right thing they are quite prepared to pay over the odds for it because it is a rare oportunity and they may have to wait or compromise if they don’t. Properties like Duntisbourne comes up once or twice a year and as we can see from this example, if 70 people want it, there is going to be competition. These buyers will almost certainly have been advised by the growing band of specialist buying agents who represent the rich and famous and who seek out these kind of homes for their clients.

At the bottom of the market, vendors are still having to come to terms with their home being worth less than it was a year ago. When you couple it with the fact that there are fewer buyers and that those that do exist can no longer get 100% mortgages with sensible arrangment fees you are then left with the expectation that the mortgage valuer will have a more pessimistic view of the proposed purchase and values the house for even less!

The market in this respect is split at around £2m. Above this you have a good chance of not just selling but of getting a good price too. Below this and certainly when you get nearer the national average, I suspect that you have a one-in-three chance of finding a buyer and being able to move. The good news is that traditionally, the spring market is when things pick up and sales take off. Just don’t hold your breath!

If you want to sell, get real!

It’s Easter and traditionally, a lot of homes go on the market over the bank holiday weekend. It may sound harsh but if you want to sell your home now you really have got to appreciate the reality of the current market and that a lot of things have changed in the last 12 months. If you aren’t then you may be better off waiting for the market to find it’s bottom and join in again when stability returns.

Firstly, your home is probably already worth 10-15% less than it was last August – just before the Northern Rock imploded. You are going to have to ask less than you would have last year and you almost certainly will have to accept less. Take advice from agents who deal with your kind of property and listen to what they are saying. Their business depends on turnover and they only get paid if property sells so they are fixated about making your property saleable.

(Remember, if you are buying and selling in the same market, if you take a hit on the value of your home, you are more than likely to be able to buy for less too. It’s all about the difference between what you sell for and what you pay.)

The time it takes to sell is going to be longer in 2008. It will be on the market for about 93 days  according to Rightmove and nearly six months in total from start to completion.

It will cost money just to market your home thanks to the Governments introduction of Home Information Packs. Typically, HiPs cost about £425 to get one produced and you must have one if you market your home either privately or through an agent.

You can expect fewer buyers through the door as the number of viewers per property has  fallen by 33% according to Hampton’s earlier this year. Those that do turn up will have found it much harder to get a mortgage offer and some suggest that you shouldn’t really invite anyone to look who hasn’t got a mortgage offer in principle first. No more 125% loans, bigger deposits required, 40% fewer mortgage products and interest rates now totally detached from the Bank of England base rate. Believe me, getting a mortgage offer aint as easy as it was and quite a few people can’t get one at all.

Once you have agreed a sale, be ready for the valuer who will come round to sign off the value for the buyers mortgage company. He is liable if it turns out that the property isn’t worth what your buyer has offered. As a result, in a hard or falling market, many will err on the side of caution and down-value just to be safe. The problem is that the lender will only lend on this lower value and your buyer may not be able or willing to raise the difference in cash. If they can’t or if they are scared by the figure that the valuer has put on it they will try and renegotiate. Will you want to take a lower offer? Can you afford not to?

Finally, the cost of moving home will be more than you will have expected as the bills and taxes roll in. Agent fees, solicitors costs, the HiP, the stamp duty on your new home, the higher arrangement fee that you will face for your new mortgage. The list goes on. The bottom line is that if you want to sell, there is still a market but take advice, listen to what those who are in the market are saying not the lenders and others who still insist that the market is “rubbing along”. Be ready to do everything possible to attract a buyer and if you find one, grab them and hold onto them. There aren’t as many genuine buyers around as there were a year ago and as this year goes by, I suspect there may be even fewer. 

Happy Easter and good luck.

The State now takes over £10bn a year from home owners.

As the Chancellor sat down having delivered his first budget we are all left worse off than when he stood up. If only the weather had been able to have a similar effect on his afternoon as it did in cancelling the second day of the Cheltenham Festival.

The Government will take over £10bn from home owners this year – the majority from sellers who are bravely trying to pick their way through the debris left by Alistair Darlings’ mismanagement of Northern Rock. Property now provides more revenue than ever before as the Treasury seeks to bridge the £5-10bn gap that is reported to have developed between the tax take and what the Government has pledged to spend.

Inheritance tax charged when a property passes from one generation to the next last year generated over £4 billion. Stamp duty on the purchase of homes raised another £4.6bn in 2007 with 82% more being squeezed from first time buyers alone who on average paid over £1,700 each. The new stream lined Capital Gains tax which applied to buy-to-let landlords and smaller developers will raise more as of course will the new Development Land Tax levied on the builders of new homes before a house has even been built!

Perhaps most galling is the VAT charged on Home Information Packs this year which are required for all homes marketed and not just those that are sold. This is expected to be over £100m which can be added to the Tax charged on estate agency fees (£450m) legal costs, removal fees and home improvements (which total another £500m)

The Chancellors’ efforts to encourage lenders to offer long-term fixed rate mortgages looks like it will require yet more red tape and regulation to ‘force’ Banks to offer these sorts of products. It is worth remembering that despite the drops in interest rates from the Bank of England the Chancellor has not been able to get Banks to join in and it is hard to find lenders who have passed this on for new borrowers. Can you see this William Heath Robinson idea working?

Many will feel that the Chancellor has mugged home owners and has missed the opportunity that this budget provided to recognise the pressures that they are under. As the market slows, property values fall and people find that it is harder to re-mortgage many will blame the Chancellor and his predecessor Gordon Brown for the amount they take, their stewardship of the economy and then 25 million households may well feel motivated to vote them out at the next general election.

Market update from Phil Spencer

Over the last few years demand from purchasers has very rarely been matched by the equivalent supply of houses for sale. This has resulted in the constant upward pressure on prices that we have become accustomed to. So far this year the supply side is increasing broadly in line with demand – which means we have a state of equilibrium. The market is flat. After so many years complaining about the heat and pace of the market you would have thought the broadsheet press would have welcomed the current scenario, rather than vilified it. Contrary to popular belief I believe the situation today is a perfectly acceptable one. Secondary or compromised property is sticking and whilst conditions are better suited to buyers rather than sellers, even this plays out differently in all the sectors and regions that make up the entire market.

Whilst there is still hesitancy and caution – there is also a sense of realism and acceptance. Dark clouds are on the horizon but severe weather is not expected.
There are caveats to the weather forecast; such as the ongoing debacle over the non-dom tax. The top end of the market would be extremely vulnerable if the Chancellor was to do something stupid. The extent of the credit crunch has yet to be identified, but it will certainly affect the City bonus pool for 2009. Is the US in recession? And if so, does that lead to similar conditions here? There are also question marks over affordability in relation to both interest rates and mortgages – fewer mortgages are available today and far greater restrictions on those that are. This is already affecting activity across the mainstream market. It remains unclear which direction interest rates should head as the MPC face a difficult state of affairs – inflationary pressure at the same time as slowing economic growth.
Nevertheless, life goes on. Every day people are still being born, moving to the UK, getting divorced and dying – the housing market never shuts down. Aside from the sanity of the Chancellor, the top end of the market is relatively well insulated from hitches in the mainstream market.
One of the sectors Garrington has been particularly involved in over the last few years is the family house market, circa £2Mil – £4Mil. Whilst our clients tend to be in positions from which they can proceed quickly, we are currently experiencing the build up of chains of transactions. This is particularly evident in traditional family areas where the majority of people need to sell in order to buy. Chains are becoming more fraught, delayed completions common. It is our clients’ ability to proceed immediately that has enabled us to secure several properties at favourable prices, despite the existence of higher offers being on the table.
Also noticeable across the country, and in some part related to the chain situation, is a greater willingness of home owners to sell up, deposit cash in the bank and move into rented accommodation. Being out of the market in its current state is not a particular concern and the ability to return as cash buyers not in a chain can be of great benefit.
Looking forward, we are not predicting dramatic changes to the markets in which we work. Supply is at reasonable levels in the London market and just beginning to arrive in the regions. We do expect total numbers of buyers and sellers to increase following an early Easter, but these numbers are likely to do so in tandem; which means although there will be more people involved in the market than now, prices will remain static.
PHIL SPENCER
Chief Executive

7th March 2008
www.garrington.co.uk

Sale now on – at your local estate agent

Ahead of the Easter holidays and hot on the heels of Alistair Darlings’ first (and hopefully last) budget comes news that home buyers have been waiting for for over a decade – an estate agent with an Easter Sale!

Reeds Rains, a chain of estate agents with over 150 offices in the north of England have slashed prices on 2,000 of their properties. Altogether, over £15 million has been chopped from it’s stock of houses for sale with the average reduction just under £8,000. Since their average asking price was £148,000 this means that the stickers in the window scream “5 1/2% off!” and you can expect that if you turn up to haggle and have a valid mortgage offer that you might get even more.

The MD of Reeds Rains, Nigel Favas is quoted as saying that there has already been a “fantastic” response from his clients “enabling buyers to see what vendors will sell for has a benefit for both parties.” I bet. 

With values on the turn and prices actually falling in areas like Nottinghamshire according to the Land Registry it is not surprising to see asking prices being dropped. What is worrying is that the website Rightmove.co.uk has suggested that asking prices have already fallen by £5% since last October. What seems to be happening is that as the market slides both agents and sellers are chasing prices down. In a falling market you have to price ahead (i.e. to where people expect to see the guide price) not where it is today. 

In what I would admit was not a very scientific experiment, last week I looked at 300 houses that went on the market last August. About half had not sold and were still, seven months later, still being offered for sale. Of those that were no longer on the market, less than 20% appeared to have sold although this figure may rise as the Land Registry catches up.

So, if you are already on the market or thinking of selling, make sure you listen to your estate agent and be aggressive with your asking price. Unless you look serious, buyers will assume you are either flying a kite or stupid. Either way you will appear unrealistic and they will go and look at something else. If you are looking to buy, shop around. With some agents already in Sale mode, it looks like the market is falling away faster than the traditional indices are reporting. 

Remember, it ends up costing nearly twice as much to borrow £1 as a mortgage over 25 years so if you can save yourself £8,000 now it’s like saving £16k over the period of your mortgage – £16k paid out of taxed income! If you can save another £8k at the start then you may just be able to afford the fees, taxes, higher living costs and expenses that you will have worked out or been told that Mr Darling has just added for the privilege of moving house and improving your lot in the UK in 2008.