The property columns seem to have become obituary columns but markets never stand still and there are opportunities in both upturns and downturns. Accurate forecasting is awkward during volatile periods, but the range of conclusions has been particularly complex for anyone interested in the top end of the housing market.
Recent Halifax figures show prices fell by an average of 2.5% last month, the biggest fall in a single month since 1992. However, they went on to conclude that average prices were still 1.1% higher than they were twelve months ago. It is negative equity which forces home owners to sell and it is only when the numbers of forced sellers reach significant levels that a market actually crashes. Using data from 80% of lenders, Experian estimate 8,000 people are already in difficulty and more than 23,000 would be in negative equity if prices fell by 10%. A 20% fall would mean 78,394. Given that there are around 14.5 million owner-occupiers in the UK – I do not believe these numbers would bring about the type of market collapse being hyped up in the press. Yes – there will be pain felt in certain sectors, but it is by a relatively small number of people.
Conditions have been shifting on a fortnightly basis and the market is incredibly polarised; different postcodes and price brackets behave quite independently from one another. It is therefore impossible for mainstream press articles to offer more than an idea of general trend. Without a clear understanding of how each of the various statistics are collated, the relevance to your circumstances, and from which stage in the transaction process they refer to, the information is of limited use.
At the time of writing the prime London and country markets in which Garrington operate have shown a reasonable degree of resolve. It is the sub £500K mainstream market where the worst effects of the credit crunch have been felt thus far.
Our feeling is that although confidence has been eroded and prices are dipping, the prime sector of the market will outperform general trend by a respectable margin for the year as a whole. Buyers and sellers in the prime markets have good credit ratings and tend to apply for smaller ratios in terms of loan to value and so are largely unaffected by the credit crunch itself. However, as well as restricting the mortgage market, it is heavily impeding both employment levels and earning capacity in the city. Activity in the financial markets has a huge bearing at the top end of the property ladder and it will therefore be the lack of bonus payments in 2009 when the top end will be at risk.
The Bank of England has just announced it is making £50 billion of bonds available for banks to use to securitise mortgage debts, something the money markets have been unwilling to do. This will increase liquidity by allowing the mortgages stuck on lenders books (that no-one wanted to buy) to be converted back to a more liquid form, to permit re-lending again. The average mortgage deal should now start to improve quite soon but it will probably take until September for normality to return.
Meanwhile the bottom rung of the ladder has effectively been removed, transaction volumes are falling rapidly and chains becoming longer and more fraught. On the positive side, long-term investors who picked the right stock are already benefiting from increased numbers of tenants and higher rents, some opportunistic buyers have also been capitalising on vendor insecurities and distressed sale conditions. At Garrington we are enjoying both opportunities as well as excuses to negotiate aggressively on behalf of clients and have successfully been ‘hedging’ our clients against the down turn.
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.
There are risks for all sectors and just as everyone is repricing risk in the financial markets – so they will try to do so in the property markets. As we head into the Summer, only time will tell whether the slowdown becomes more entrenched.
Whatever the outcome, Garrington will be monitoring the situation extremely closely.
29th April 2008
“The extraordinary sight of a £50bn bail out to banks is not going to halt the slide in house prices which has come about as lenders decided that the mortgage products they were offering were simply unaffordable. Lenders had noticed that prices were topping out and the terms they had been offering were too generous.
They required new borrowers to find larger deposits and their valuers were marking properties down as they realised that people could only afford to borrow enough if the interest rates they charged stayed low. Inflation looks likely to put upward pressure on rates – in any event house prices don’t form part of the Retail Price Index and anyway banks have been extremely reluctant to pass on previous rate reductions. The traditional bankers caution had been forgotten in their rush to provide ever bigger mortgages. Something that will have changed after the fright of the past six months and if they are bailed out, something that they may well feel they have got away with!
Even if you assume that this hand out by the Bank of England allows banks the confidence to start lending again – which in itself would be welcome there is no chance that they will immediately return to the days of 100% mortgages or that they will want to charge less for their few remaining products. The best we can expect is that they will at last start to actually provide mortgages again but the rates will be high(er) and the terms less attractive which means that both sale prices and volumes will still be at reduced levels. In reality, as we saw when prices peaked, the market takes some time to change direction and the current slide is unlikely to be reversed before the summer.
At Primemove.com where we bring together property for sale across the internet we can see a back log of unsold property on the market that has built up since Northern Rock. The average estate agent has over 70 properties for sale on his books. New property coming onto the market is being priced to compete with this older stock and all vendors are having to adjust to the current market conditions. Only those who have taken a realistic view of what they might expect to get are catching the eye of potential purchasers leaving nearly 4 out of 5 house sellers currently without a buyer.
Latest figures released this morning by Communities and Local Government confirm that house prices are falling fast with the average price in February down to £217,000 from £221,000 in January. This confirms my own observations of the market which sees average house prices falling by about £1,000 a week at present.
According the the Governments own statistics, annual house price inflation in Scotland was 9.7%, in Northern Ireland 3.7%, Wales 3.8% and in England 6.6%. Prices fell 0.5% for the quarter ending February 2008 but since these figures are based on about 50,000 sale completions – most of which would have been agreed last year we should expect these figures to continue to fall.
Like all historic surveys this one tells us what things were like three or four months ago. As most people know, the market today is suffering from chronic funding problems which we hope will have been eased today when the PrimeMinister met with representatives from the banks and other lenders.
Although larger houses will have seen greater falls in real terms the average home is loosing about £1000 a week at present. Many vendors who are still ignoring advice and quoting last year’s asking price are finding that buyers are put off and as a result, currently only about 1 in 5 homes is finding a buyer. The RICS survey out this morning illustrates that surveyors are feeling equally gloomy and we must expect this to get worse before it gets better.
Comments reported from the head of the Grosvenor Estate in London suggests that even those involved in the top end of the market are concerned and I share Jeremy Helsby’s view that the market – even at the top could fall by up to 20% from it’s peak last year. In my experience, wealthy people are usually rich because they are sensible and I think it’s unlikely that they will continue to pay over the odds for property for themselves when they can see buying opportunities lower down the market.
“Todays buyers determine the value of everyone’s houses”
“In the rush to analyse the impact of yesterday’s base rate reduction the majority of commentators have missed the point” says housing expert Henry Pryor. “Of course lower rates should be good for borrowers and those who have tracker mortgages will be better off almost immediately, but it’s the rates and terms offered to new borrowers that we all should be concentrating on”.
“The cost of mortgages is understandably important to all borrowers” he says “but the value of your home is decided by the prices that current property is selling for. It’s the classic tail wagging the dog. Last year, 997,000 sales dictated the value of the nations 25 million properties. Recent figures from the British Bankers Association suggest that the number of sales in the past 6 months is already down 33% so it may be that only half the number of homes change hands this year compared to 2006 and these few sales will determine what everyone’s homes are worth.
“Stay with me” says Pryor “because this is the important part. Today’s house buyers are new borrowers who are certainly not getting the benefit of yesterday’s rate cut, who are in fact facing higher rates, stricter conditions, higher arrangement fees and have to find larger deposits. As a result, there are fewer of them (less demand), they can afford less and the prices they pay will therefore be lower. The result” he says ” is that your house is worth less even though you didn’t actually take part.
Pryor concludes, “People may be concerned about whether their mortgage has gone up or down as a result of yesterday’s drop in base rates but my guess is that they will be more worried that their house has fallen in value regardless and until lenders get back into the market and start lending again, they will continue to fall whether their mortgage payment goes up or down.
Today’s figures from the Halifax once again demonstrate how behind the times surveys from Lenders and the Land Registry are. They’re about as much help to both house buyers and sellers as a chocolate fireguard.
Those actually involved in buying and selling day-to-day have been concerned for months but lenders have been slow to admit to the reality. The Nationwide only revised their predictions downwards in the past few weeks and other mortgage providers have been equally mute to what is really going on.
The Halifax survey gives us the housing market equiverlant of a weather forecast for 1987. Based on mortgage advances made during March, the lender who just this week raised their own lending criteria and the rates for new borrowers have informed us that prices fell 2.5% in the month. The Land Registry who provided their figures for February just last week saw things differently. Both are based on historic events.
The Land Registry suggested that prices in the West Midlands rose 1.3% in February and yet Halifax says that prices here fell by 5% in March. Anyone thinking of selling in the Black Country are going to be totally confused. In fact, we have seen agents trying to give objective advise since Christmas and they have been adjusting asking prices accordingly.
Lenders have run for the hills in recent months withdrawing products, ignoring the Bank of England base rate and hiking arrangement fees to make getting a mortgage harder than at any time since Black Wednesday. Until lenders get back into the market and start offering mortgages again conditions will continue to deteriorate. Even if the base rate is dropped on Thursday as is widely expected, the gap between it and 3 month Libor (the rate at which banks lend to one another) will be the same as it was a week ago. Those of us involved in the current market know that just how tough it is now and we must expect these historic surveys in the months to come to reflect this.
A survey out today from property website Primemove.com suggests that the slow down in the housing market may be far worse than mortgage lenders have been suggesting and that the recent action by many in withdrawing their products is contributing to the problems facing those who wish to buy and sell.
Primemove tracked a sample of over 18,500 homes that had been put on the market since August last year and found that just 20% had either been sold or had been withdrawn from the market. The website, which aggregates property for sale from across the internet looked at individual homes across the country and from all price brackets and found that just 3,850 were no longer being advertised. Spokesman and founder Henry Pryor said “the figures from the Land Registry which were published on Tuesday showed that the number of sales in December was down by 40% when compared with the same month in 2006 but it looks as if around 80% of people who have put their property on the market since the Northern Rock crisis have yet to find a buyer.
“Whilst we have been urging caution for the past 12 months, lenders have been arguing that things were not too bad and their indexes have been suggesting that house prices have continued to slightly rise – even into the new year. Frankly “liar, liar, pants on fire”. I don’t believe a word of it and it does a huge disservice to sellers and to the rest of the market when those responsible for funding house purchases not only deny that the scale of the problem but compound it by withdrawing their products so that even if someone finds something to buy they now find that some banks don’t have a single mortgage product to sell!
Pryor continued. “I feel like the little boy who has spotted the Kings wardrobe malfunction. Lenders are suggesting that they are withdrawing their products because they don’t want to provide a poor service to their customers. Well, I hope that our new nationalised bank that has already directly cost taxpayers £24bn will decide that here is an opportunity and start to fill the demand that exists from people who want to buy but can’t get a mortgage. Those who want to buy a home need institutions to get back to work and start lending money. They may have to charge more for it but at least there would be a market and both buyers and sellers would know where they stand. There seems to be money to pay bonuses but not for lending. As the saying goes, when you have money they want to lend you more. When you haven’t, they aren’t interested.