The Other side of the story

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.

Chief Executive

29th April 2008