Perception is far worse than reality…. says Phil SPencer.

The general feeling of cautiousness in the market seems to have morphed into one of resignation that it’s going to be a quiet winter. Uncertainty, due to the cumulative effects of interest rate rises and negative future predictions spun out of the Northern Rock situation have resulted in a distinct reduction of market activity. People are reluctant to commit. Notwithstanding this, the feeling at Garrington continues to be that the wider perception of the state of the market is worse than the reality we experience daily out at the coal face. For all the reasons we have outlined in previous updates, the prime sector is relatively well insulated; best in breed type property in this sector continues to attract immediate interest and full prices.
However, the underlying trend is one of a slowing market. We are already seeing that property is remaining on the market for longer and that ambitiously valued or compromised stock is being trimmed in price. Both these trends are set to become more pronounced in the coming weeks.
Conditions alter a lot faster and more frequently then the statisticians can keep up with; the latest figures available only reflect the September market where Hometrack reports sellers achieved 95% of their asking prices but that there was a 2.7% drop in the number of sales agreed and a -4.5% drop in numbers of buyers. Primelocation’s September analysis shows a surge in the number of prime London properties for sale, up 11.8% on last month and by 30.3% on last year. Volume of prime property for sale in the country was up by 3.8% on last month and by 32.6% on last year.
There is a stalemate position today as buyers and sellers consider their strategies. In the first instance a slow down usually affects the sentiments of sellers as they wait for more favourable conditions before putting their homes up for sale. Consequently supply of fresh stock to market decreases, which in turn increases the demand for each available property. This is the ever shifting see-saw between supply and demand that either drives or restricts our housing market. Once the see-saw has passed the tipping point where the imbalance starts to favour the other side, market prices will react. In this case, once there is more demand from buyers than supply from sellers, prevailing conditions will return. The real question is – how long will this process take?
In the meantime chains will become longer and more fraught as unrealistic sellers struggle to find enthusiastic buyers. Shrewd purchasers will be looking out for opportunities to flex their negotiating muscle and drive hard bargains. Like two boxers at the start of a title fight, it will take a while before the two sides stop ‘squaring up’ to one another and engage in meaningful combat.
The big news of the month is the surprise Government announcement concerning proposed changes to Capital Gains Tax on investment properties. From April next year it appears investors will only be required to pay 18% CGT on their profit margins, instead of the current 40%. Aside from the straightforward financial advantage, the short-term dynamic of investment market will be affected in two ways: firstly, investors who may have believed this was the high water mark and had been about to sell up – won’t. They’ll wait until next April to benefit from the change in levy. This will further reduce supply to market of typical buy-to-let or first time buyer type property. Secondly, there will be a dramatic change after next April when these properties all arrive on the market at the same time. Both scenarios are sure to affect prices.
Despite the IMF’s recent warning that the UK market is 40% over valued, we are not heading for a collapse. A significant collapse only happens in a market when homeowners are forced to sell against their wishes. This is an island with a rising population; we already have a serious lack of new housing and an inability to speed up the building process. When these scenarios are considered in conjunction with the amount of equity people have accumulated in their existing homes, only a very few will be forced into selling.