An three minute package including comment from Sarah Beeney plus a three-way with a first time buyer who confesses to being raised with the instinct to own his own home. An enjoyable return to Sky News for the first time since 2007. Will it be another four years….?
The latest snapshot of the housing market in England & Wales taken by the Land Registry and published this morning shows that sellers have been accepting slightly higher prices in the past month with the average price of a home now estimated at £163,049, up 1.3% on the previous month but still down 2.1% on July last year.
Whilst homes in London and the South East once again faired better than average with prices in most London boroughs showing no change on the previous month but with some now showing a decline over the past year. Hammersmith & Fulham for example saw prices fall by 0.1% on June but still up 4.9% over the last year.
The North East suffered miserably once again with prices here down 2.3% on the previous month leaving them down 8.8% over the past year. Those who bought 4-7 years ago will only have put down 5-10%. In areas like the North East many of these people are now in negative equity.
With no sign of lenders relaxing the criteria they demand for those seeking a mortgage it remains extremely difficult for buyers to save what for many is more than a years salary to put down as a deposit. In 2007 with 95% mortgages common the typical first time buyer only had to save 36% of their yearly income.
An additional break on the market are the number of mortgage holders who have lost the equity they once had in their house. Even if they can sell, they have no money to put down for the next property. With around a quarter of all mortgage holders thought now to be in negative equity there are more than 2.5m home owners trapped with no way of moving on. These homes in turn are not available to the next generation to move into creating what can best be described as a constipated market.
The top of the market is now causing some concern despite prices for the very rich still rising. Volumes of sales of homes over £1m were down in May by nearly 45% on last year suggesting that even these fortunate few should be wary of the gangrene setting in lower down which could infect the whole of the market before too long. Either lending criteria needs to be relaxed or prices will surely fall.
The number of homes sold in July in the United Kingdom was just 79,000 according to figures released today by the tax man. The monthly statement from HMRC confirms that whilst in July last year there were more than 89,000 transactions last month the number FELL by 13%
In July 2006 there were over 148,000 transactions as the market was heading towards a peak in values twelve months later. Over the course of 2006 more than 1.6m homes were sold but this figure halved last year to 880,000.
In both Scotland and Wales the volumes have halved from 13,000 and 6,000 respectively to 7000 and 3000. But it is in Ireland where the buyer’s strike has taken the firmest hold. The total number of homes sold has fallen from 4,000 in July 2006 to just a thousand last month!
The number of people putting their house on the market has also fallen but not by quite as much. It costs next to nothing to put your house on the market and since the abolition of Home Information Packs a year ago there has been a slight increase in these volumes.
The problem remains that there are few buyers who can actually transact. Whilst there are huge numbers of so-called ‘tyre kickers’ looking at web sites those who can qualify for a mortgage or who have the additional equity required are small in number. As a result, only one in three homes are selling.
In 2007 the average first time buyer saved 35% of his annual pay as a deposit for his house and he was able to borrowed 95%. Today he needs a whole years pay as he can only borrow 75%. With average house prices according to the Land Registry still 16% below their 2007 peak there are now a million people who have lost the equity in their homes, who even if they could take the physiological hit on the price they had hopes for no longer have the necessary equity to put down for the next property These people are blocking the homes for the current generation of first time buyers and are to all intents and purposes, prisoners in their own homes.
This was the stark message I was given by a City analyst at the end of last week as fiscal riots ran through the markets and the main indices across the world bounced around like the contents of Jordans jumper. Investors couldn’t decide where to stash their cash – gilts, bonds, gold seemed popular of course but my suggestion of ‘what about good old bricks & mortar’ was lost like a fart in a storm. In a perverse way some even seemed to get off on the panic, like voyeurs watching looters in a JD Sports shop the commentators wrung their hands and tried to make sense of the incomprehensible.
Those who have been on holiday for the past few weeks will return to find life is very different. England is the Nº1 Test nation and whilst that minor miracle has been taking shape the streets resembled a Mad Max set for four nights and the financial markets look very similar to how they did in August 2007 – just as people started to queue up outside Northern Rock offices. Without a Blackberry or access to the BBC News Channel coming back with a tan will look spectacularly stupid! Even Boris Johnson worked out that what was happening was something worth breaking a holiday for!
So as we start the autumn the chances of a physical or financial mugging seem rather worryingly high. Property we know is an illiquid asset, it is expensive to transact with Stamp Duty, fees and maintenance costs in addition to the cost of getting an income from your property – more fees for letting and managing a tenancy, voids, funding… the list of outgoings can appear off-putting – and all for the sake of a pitiful 4% gross yield at present!
In fact there are places you can do much better than 4% I’m told. My old friend Stuart Law at Assetz wouldn’t get out of bed for much less than 8% net. But if you are looking in the primary areas – central London, Cambridge, Bristol for example then you will be hard pressed to get a net return that would buy a good lunch. Agents in these pimped markets tell me “you have to factor in the prospect of capital growth Henry” but they look at their shoes in embarrassment if you ask if they are guaranteeing capital growth. “Are you putting your Professional Indemnity Insurance behind that statement?” I ask – a question you seem not to be encouraged to ask. “In all my years I have never known property in London/Cambridge/Bristol (delete as appropriate) not appreciate in the long term” say the bull-shitting, commission-driven spivs! So that’ll be a ‘no’ then!
However, I may just be doing these lovable barrow-boys a dis-service. As my jumpy City friend was explaining last week, 4% gross when borrowing is officially at 0.5% looks attractive. 4% gross ain’t bad when you consider what happened to equities this month. Where else could a suspect North African with a bank account of questionable commission fees park his ill-gotten gains? He’s done well to slip out of where ever it was he made his money without loosing a large chunk of it – the new democratic rulers always seem so suspicious of someone who made a mint while they were being trodden into the ground by his mate – the then PM. If our investor were to over-pay by 20% for a nice property in London it’s maybe better than loosing a load more to the new unforgiving regime!
But where else could you invest £1m? Inflation is supposed to be around 5% so in theory you need more than that just to stand still. Up to £100k is all that is protected if you pop it in a High Street bank if the bank goes wrong. Shares seem to be on the slide. Bank debt has been transferred to Sovereign debt and we are now waiting to see if Governments can front up the speculators any better than the banks did. Norman Lamont’s in experience in September 1992 doesn’t bode well!
While we wait to see if or perhaps when the Euro unravels, gold has become the unofficial global reserve currency of choice but some think it has topped out. What else could you invest money in with some confidence you might get the bulk of it back? Property has at least one redeeming feature – you could live in it!
The choice is not that great. National Savings Income Bonds offer 1.75% gross on investments up to £1m and the whole lot is guaranteed by the Government. Uk Government bonds offer 2.24%. 10 year gilts in London last week were are offering 2.5%. A Post Office online saver will give you 3% on sums up to £2m. Then we start to get into products that have some risk. Just as the capital value of the property you buy could fall thus shredding the miserly 4% yield so it can happen with shares – even those in blue chip companies. Barclays Bank shares for example are down over 52% so far this year!
We all know that gold has been a great punt but according to Berry Bros, wine hasn’t done too badly either Lafite Rothschild has been so popular for instance that demand for the estates Second Wine, Carruades de Lafite 2005 now trades around £2500 per case – up from the selling price when it was released in June 2006 of £400 a box. Indeed the Liv-ex Fine Wine index is currently at 359.01. It only broke 200 back in April 2007.
So, whilst remain certain that a 4% return on a property is derisory in the current climate it is easy to see why some investors are persuaded by the sales patter of agents talking about ‘increasing capital values’. If values do rise then 4% yields will have been pain worth taking but while there are so many who think we are going to hell in a handcart, I prefer my clients to only buy when they can smell blood in the water. If anyone is going to loose money it should always be the other guy! After all, depending on when he bought the chances are he has a profit that will accommodate his perceived loss.
“You don’t make money when you sell, you make money when you buy cheap”. So say the property sages, those who made money in the 70’s, 80’s and 2000’s. However, in this market holding cash has a value itself. If you have money in the bank you can always jump in when you see a real bargain. In the coming weeks there will be many who can’t hold their nerve. Opportunities will present themselves and some will be even cheaper if you can move quickly. Don’t undervalue the value of having cash to invest – it’s worth 2% on top of of whatever else you can get!
In the past month I have been experiencing a form or ‘Ground Hog Day’. On at least seven different occasions I have found myself explaining how to work out if someone is asking too much for their property. Speaking to nervous buyers they find the blizzard of house price reports confusing rather than illuminating, rather than making things easier the internet has made life more difficult with a form of information overload. Some websites now look so credible that it’s easy to forget that a £130bn business like Rightmove.co.uk for example is almost exclusively a shop window for estate agents with property for sale and to let and their comments on prices are usually based on asking prices. The extremely well put together Rightmove monthly house price report could be described as just a ‘Greed Gauge’ and only really tells you how much people want to get for their properties.
Remember that it costs nothing to put your house on the market so an ambitious asking price costs you nothing – directly. There are over 850,000 today and last month, according to HMRC just 73,000 sold across the UK. Sellers by nature are optimistic – they only have a 6% chance of finding a buyer in the first month and at present only a 30% chance of selling if they leave their house on the market for a year!
It’s the same with indices from lenders like Halifax & Nationwide. Their monthly report is based on the mortgage advances they have made. The biggest is the Halifax and they have a 20% market share. With around 40% of the few sales that are happening at present ‘cash’ deals (ie. with no mortgage involved) the mighty Halifax survey is sometimes based on fewer than 7,000 sales across the whole country!
The Land Registry is often said to have the final say on values. The fact that you can look up what someone paid for their property is indeed a huge help – possibly the most useful online resource to happen to the housing market but it’s worth remembering that the monthly ‘average’ that people like me analyse in minute detail is in fact a relative price – Land Registry set the index for England & Wales at 100 in January 1995 and they exclude a lot of sales. If you would like to know more about the various house price surveys (or need a cure for insomnia) then you may find this Acadametrics paper helpful.
Lastly, if you want to know the true value of something you could always pay for a formal valuation. I’m not talking about a ‘market appraisal’, the ‘advice prior to a possible sale’ given by an estate agent for free in the hope of getting an instruction to sell. I mean the figure you would have to pay a surveyor for and that he would back with his Professional Indemnity Insurance. Just remember, there are different valuations – valuations for insurance, for mortgage purposes and ‘forced sale’ numbers to name but a few.
So despite the endless guides, reports, indices and prognostications, how can one easily establish in very basic terms if a property might be over-priced or not? Valuing a property is part art, part science. The ‘art’ bit is hard. What price a can you put on the feel of a place, the proximity to friends and family or the chance to do up a home to your exact taste? These are subjective things that not everyone will want. The ‘science’ bit is much easier. It’s just a question of doing the maths.
If you work out what a property or similar property might let for you can calculate a ‘yield’. All financial investments can be compared by looking at their yield, stocks, gilts, deposit accounts…. For property this is the income you might receive if the property were let. Work out the annual rent, divide it by the capital value (the asking price) and multiply it by 100 to get a percentage.
It’s not too hard to lock up your money in a bank or building society for say 3 months and get a 5% return. Remember that with inflation this probably doesn’t actually put you ahead and there’s no risk to your money. Property howver is an illiquid asset, it costs a lot to buy and to sell, to let it out and to manage the letting. You need to take into account voids (when you have no tenant) and you may need to borrow money to make the purchase so there is a cost of funding. Even if you want to live in it you should do the same sum.
In parts of central London and in Cambridge city centre for example gross yields are at around 4%. When you remember that the capital value of a house can also fall you can see that a yield of less than 6% is only attractive if you expect prices to rise. There are not many commentators who think they will rise in the next year!
Either rents will have to rise or capital values fall for yields to improve today. Whilst we wait, the gap indicated between average asking prices and average selling prices illustrates what many smarter home buyers are doing. The samples on which each average is based are not identical but what they indicate is that those who are doing deals are not paying ‘ticket price’, they are being savage and ensuring that they get a decent yield that will help protect them against falling prices in the months to come.
So, when you are working out what to offer for the home you want to buy calculate the yield and make an offer that adds up.