(Labour Party leaflet from 1923)
Back in January 2007 in an article in the Financial Times I rashly asked out loud if perhaps the housing market might have peaked. In a subsequent interview on the BBC Today program I explained what provoked such a question. At the time, the market was in full party mode with buyers, sellers and estate agents all supping from what the then Bank of England Governor described as ‘the punch bowl’. Something that he belatedly decided to take away.
In the winter of 2006 it all seemed just a little too good to be true. Interest rates were stable but not low by today’s standards at 5% although they would rise to 5.75% by the summer. The Land Registry estimated the average price of a house had risen 6.8% through 2006 to £172k. Transaction volumes were cracking along at over 1.5m transactions a year and lenders were cheerily offering 100% mortgages. One lender called Northern Rock was even offering a 110% loan-to-value mortgage!
It has always been my view that house prices are set by the availability of credit. In Q4 of 2006 credit was about as slack as a whores draws! Self-certified mortgages meant that any liar could borrow whatever he needed and since almost everyone got paid when there was a transaction getting deals done was all that mattered.
The only problem was that clearly this couldn’t continue. I had worked through two previous recessions and I knew that at some point the music stopped and someone had to pay the bar bill.
So, what next? Well, the changes brought about by the excitingly named ‘Mortgage Market Review” is already making it harder work to get a mortgage and this is slowing the market and will drag back prices by Christmas. Recent comments by the ‘unreliable boyfriend’ as Mark Carney was described by one MP shows the schizophrenic side of the current Govenor of the Bank of England. First he suggests that the Market may be surprised how soon interest rates might be raised and then he says that whilst their keeping an eye on the housing market in Threadneddle Street rates will probably only be at 2.5% by 2017. So that’s all clear then!
I think rates will rise but I don’t think that this will tame the market much. The coalition government are clearly determined to ramp prices ahead of the General Election next Spring. Controversial Help to Buy equity loan scheme has been extended until at least 2020. This initiative gives confidence to those in the housing market rather than an actual lift to prices but it will keep the market moving.
Clearly everyone who can get their hands on the levers of power in Westminster will claim they have tamed the excesses of boom and bust but I think that’s naive and the high prices we have seen paid in the Capital of late will be the last significant rises for the next few year. Outside the gated community of the M25 I expect life to be much tougher for estate agents and their clients. The market has already found it’s equilibrium and that for most is still 10% below the peaks reached in 2007. I expect turnover to continue to tick over but prices will struggle to advance from where they are today. The good news is that whilst still defying gravity I don’t expect house prices to crash to earth.
New rules on what you can do with your pension is the main reason for my tempered optimism. People are going to put their pension pot in property rather than buying an over-sold annuity. This is going to impact far more directly than Help to Buy or any other Government initiative and was almost certainly maintain prices and trading volumes. Whether it fuels prices is still unclear to me.
So, this summer the latest Land Registry report confirms prices are once again up 6.7% over the past year and that an average home in England & Wales (if there is such a thing) is worth £172k as it was at the end of 2006. Will we see a repeat of 2007? It feels scarily familiar but on balance I don’t think so.
This article first appeared in the Investment Times July 26th published by Hargreaves Lansdown. Download a copy from the App Store here.
The coalition Government won’t want to see a sharp drop in prices anytime ahead of the General Election next Spring. Bear in mind that of our 24m homes, one third are owned outright, one third are owned with the help of a mortgage and the remaining third are rented. This last group is split roughly down the middle between social housing and private rental. Politicians know that provided home owners feel wealthy they may ignore the fact that the economy is surviving to some extent on the artificial stimulant of quantitative easing.
In terms of political action, two of the three main political parties have pledged to bring in a mansion tax, capital gains tax will apply to overseas investors from April next year and in recent weeks the Bank of England has woken up to the fact that house price inflation may be a problem in some parts of the country as many predict the average rise for the whole of the UK will be close to 10% this year.
Following the Mortgage Market Review I expect lenders to remain much more cautious about the loans they make – especially when it comes to riskier ‘interest only’ mortgages. This may blow some of the froth off prices. However the main driver of property prices will not be politicians, it will be Mr Market. Some estate agents tell me that property isn’t over-valued – they maintain that there has just been “a re-rating” and that today’s high prices are the new norm. But even these die-hard optimists are not suggesting that prices will continue to rise as fast as they have recently, especially in London. Tighter lending criteria mean that sales are already taking longer to process, a fact that has yet to show up in the lagging property market indices.
Meanwhile rents seem to have plateaued in many places which suggests that we are close to the peak of ‘affordability’. With little sign of meaningful wage inflation tenants may now be spending as much as they can afford on rent. The resultant low rental yields may not be acceptable to buyers for much longer. Many investors will soon realise that buying for capital gains is pure speculation. London in particular offers new-build properties that aren’t investments at all in yield terms – they are straight bets on continuing price rises.
The most obvious example is the huge urban regeneration project involving 39,000 new flats being built in the so-called ‘Embassy quarter’ just south of the river Thames. I predict that many of these will be left empty. Projects like this are a knee-jerk response to our much trumpeted longterm housing supply problem and could easily trigger a price adjustment. In London in particular any drop could be rapid and fairly steep.
This article first appeared in July edition of ‘Confidant’, the in-house magazine of Messrs Killik & Cº.
The first six months of the year have been pretty manic with buyers asking me to look in London, in the home counties, in the Cotswolds, the Channel Islands and in Italy. I bid for something most weeks and usually acquired at least one property a month. Below you will find a selection of the sort of things I have bought so far this year. It gives an idea of the sort of business I do.
A neat flat in Hoxton to let out offering a 5.1% (net) yield – guide £515k – acquired in January
A development opportunity in Southwark bought off-market – guide £1.3m – Acquired in March
A three bedroomed off-market flat in West Hampstead – guide £975k – acquired in May
A wonderful country house in Buckinghamshire – guide £6.5m – acquired in June
I am often asked to recommend good lawyers, builders, decorators, surveyors and accountants as well as estate agents to sell for clients and friends. Knight Frank, Savills and Strutt & Parker have each done an excellent job recently but so too have boutique agents who are often better placed to offer a more bespoke service. Thanks in turn to Winkworth, Mullucks Wells, Wetherell & Butler Sherborn for advice given so far this year.
I act for a maximum of 12 clients at any one time, never for two with the same brief and I am currently looking for a wide range of property, here and in Italy.
Properties recommend to selling agents
Many thanks to the team in Knight Frank’s country department in Baker Street who helped ensure a smooth and successful sale to their £6.5m home to my client last week. Now all I need to find is what to do with ten head of deer!