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Light at the end of the tunnel for property market?

publication date: Nov 6, 2009
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HousesAfter a daily diet of depressing headlines, falling house prices, redundancies and repossessions its little wonder we’re searching for green shoots and itching to call the bottom of the market. Yes, the number of home purchases rose to 39,000 in March but it only sounds good until you compare it with the crash of the 1990s where monthly mortgage approvals stayed above 60,000. Then there’s the ‘good news’ from Nationwide that house prices fell by just 0.4 per cent in April, but for the same month Halifax reported a decline of 1.7 per cent. There’s activity from cash buyers, but this needs to continue to spell significant recovery, and as first time buyers hold fire lenders are up against rising unemployment as GDP is contracting fast. It’s a sobering picture to say the least.

Peter RollingsAccording to Peter Rollings of Marsh and Parsons, the market in London is at or as close to the bottom as makes no difference in a medium to long-term investment. “People either want to get on with their lives once more and move, or are seeing the market as an excellent investment opportunity,” says Peter. “Over 90 per cent of our sales in London’s central region have been to cash buyers and now that the mortgage market is loosening up I would expect the market to get busier during the year with prices probably bumping along the bottom for the rest of 2009, then starting to pick up in the first quarter of 2010. The chronic shortage of stock might mean a quicker recovery but don’t hold your breath!” Indeed, the Centre for Economics and Business Research expects house prices to fall another eight per cent from here but rise six per cent during 2010 and 2011.

However, in order to drive any sort of recovery in the housing market consensus among economists and lenders is clear; the banking crisis has to end first. Mark Graves, Managing Director of Linear Financial Services, comments, “The only way lending can be maintained at the current level is if cash purchasers continue to swallow up competitively priced properties because, although we are encouraged by the number of first time buyers who want to enter the market, there are simply not the products available for those without large deposits”. According to the Council of Mortgage Lenders, there were 34,800 FTBs in August ’07 compared with 8,800 in January ’09 and just 9,400 this February.

“Many first-time buyers are unable to secure a mortgage without the support of their parents,” continues Mark. “With lenders predicting the market will fall another 10 per cent, buyers with a 90 per cent mortgage would be in negative equity. Furthermore, home-owners coming off the back of fixed rate deals are securing variable rate deals at around three per cent, but if they moved house, that rate would increase to six per cent or 6.5 per cent so if they don’t need to move, they won’t. If anything, the market will be quieter in the second half of this year.”

It is clear that the cost of bringing a 90 per cent mortgage to the table far exceeds that of a 60 per cent mortgage loan to value mortgage so it is little wonder that all the lenders are competing in the same market space. Mark explains, “Until lenders find a way to make money out of high loan-tovalue lending we are not going to see any real recovery in the market for a while. Government-owned lenders are under huge pressure to provide products for first time buyers, but how much of this is just ‘window dressing’ remains to be seen”. Indeed Nationwide has recently announced that the demand for secured lending is expected to fall further and Merryn Somerset Webb, Editor at Money Week, appeared on prime time television this week, to advise home-searchers that the market hasn’t bottomed out. “I think prices are going to fall further over the next couple of years so if you do have a deposit and want to buy but can afford to wait, you probably should.” So unless FTBs are so strapped for cash they’ve sold the TV, they’re not likely to enter the market soon.

While activity levels in the housing market are rising, house prices in April were 17.7 per cent lower on an annual basis and the house price to average earnings ratio has declined by 27 per cent to its lowest level since September 2002, according to the Halifax, housing economist, Martin Ellis points out, “The house price to earnings ratio is a key measure of housing affordability.”

Andrew DewarAndrew Dewar (pictured right), Senior Partner of Curchods Estate Agency, admits although the agency is seeing a better flow of applicants registering and viewing, agreed sales are still low when measured against the number of viewings. “March and April have been the busiest months since September 2007 but the number of properties coming on the market is low for this time of year which is increasing the number of viewers per property.” So it stands to reason then that agents are seeing multiple offers on the well-priced properties that do exist.

“Well-priced properties are even going above asking price” says Peter Rollings, “because it was the ‘right one’ (for the buyer). In fact we’ve had 35 ‘best and final’ offers this year. Our ‘fall through’ rate has shrunk dramatically.” Similarly, Robert Scott-Lee has reported significant activity at Chancellors and comments, “With increased access to funds, good investment returns and people not able to wait any longer to purchase, we are finding a significant increase in the number of multiple offers and properties going for over the asking price.”

Andrew Dewar, however, considers the market has some way to go yet before we can expect to see sales of properties where asking prices are high. “Growth in values will inevitably come but it will be measured. The renewed activity we are seeing is fragile and will not yet cope with increased prices, despite a desire by owners to push the limits. Any rush to try and ‘force’ prices, up by agents trying to win business by overvaluing, or sellers simply being too ambitious in their expectations, could stall the fragile improvements we are seeing. I think in time, we will look back on this part of 2009 as the point, where the fall in values started to bottom out and the road to better prices and activity began.” So the question remains, how long will the ‘bottoming out’ take and how many months – or years – is recovery likely to take? Managing Director of Winkworth Franchising, Dominic Agace is upbeat.

Dominic Agace“We are seeing an improved market place; low interest rates and quantitative easing appear to be feeding through and… buyers are buying again. However, macro economic conditions such as deteriorating employment levels and ongoing bank write downs cannot be ignored. The property market cannot operate in isolation for a sustained period.

"Therefore, whilst we will see an improvement in 2009, we will not see the start of a full recovery and property price growth until these macro elements of the economy improve. We anticipate a sustained recovery leading to price growth, which will only start in 2010, although we envisage transactional levels will improve 10-15 per cent this year.”

Indeed, Chief Economist at Nationwide, Fionnuala Earley, warns that, according to the company’s Consumer Confidence Survey, consumers still think prices will fall over the next six months and Housing Economist at the Halifax, Martin Ellis, agrees; “Rising unemployment, low consumer confidence and the reduced availability of credit are all expected to exert downward pressure on the housing market over the next few months, so further house price declines are likely.”

Fionnula??However as Fionnuala points out, significant moderation in the rate at which they will fall along with the recent rise in buyer enquiries and increase in house purchase approvals, are positive and have encouraged some to suggest this is the turning point in the market. But the facts still remain; “While affordability is more favourable and there does seem to be some cautious optimism… it’s still far too soon to say that this is the start of a solid revival in the market. The housing market is very sensitive to income and, as a result, conditions in the labour market are crucial to its performance. The economy is now in the deepest recession since the Second World War and unemployment is continuing to increase with the latest data showing it breached the two million mark. Even though negative inflation will mean that real earnings will be increasing, it is likely to be some time before this feeds into a strong enough change in sentiment to encourage a full scale revival in the housing market.” This is a view shared by many; sentiment is significant.

Miles Shipside of Rightmove says, “Sentiment is turning more positive, with a majority of potential buyers feeling that we are seeing more price stability. There has been an upturn in activity, which has to be put into the context that sales activity has improved but from a very low base, but where property is competitively priced and often around 20 per cent below peak boom prices, then buyers who can proceed are active. Mortgage lending is still very restricted, so a return to a traditional market or volumes is way off.”

Before the increase in the stamp duty threshold, average house prices were above the threshold limit, of £125,000, everywhere expect the Northern region but the typical house price is now below the new threshold everywhere except London and the Outer Metropolitan region, according to Nationwide. For first time buyers, only London has a typical house price above the threshold and as developers continue to sit on land across the UK, in London demand is up.

“As far as the new development market is concerned, we are seeing high levels of demand in London for finished or nearly finished units; the polar opposite of the market two years ago where buyers saw the advantage of buying off-plan,” explains Peter Braithwaite, Head of DTZ Residential. The reason for this is the advantage of being able to have the property valued and arrange a mortgage prior to exchange of contracts, bearing in mind that most lenders will only validate a mortgage offer for three months.”

“Stock levels however are drying up rapidly as many developers sit on land, rather than building in a depressed market. This imbalance of supply and demand is creating competitive interest, particularly in well located central postcodes, however in the longer term, excluding prime central London, confidence will only return when FTB come back on the market.”

Similarly, Berkeley Homes report significantly diverse geographical trends saying that Canterbury will be one of the UK’s best performing cities when it comes to house prices. “Values in Canterbury have fallen only five per cent in the last 12 months,” says Piers Clanford, Operations Director at Berkeley Homes (Capital) Plc. “It appears this market is being fuelled by a thirst for new build homes and Berkeley Homes have had a 100 per cent increase in enquiry levels since the beginning of the year for its Kingsbrook Park development. “Canterbury is one of the prime UK cities to withstand the housing downturn. Property prices in Canterbury were not overly inflated at the peak of the market and as a result homeowners have not seen a significant reduction in their investment”.

Michael O'’s Michael O’Flynn also highlights regional trends in the pattern of market recovery. “Activity in the market has definitely increased,” says Michael. “Buyer enquiries are up, sales agreed have risen, mortgage approvals for house purchase are up and the pace of price fall is easing.

“Our own data confirms that in April, enquiries to agents were up 6.4 per cent over the month, in May the number of properties for sale listed on FindaProperty. com fell by five per cent and that since February stock levels have been falling, and are down 13 per cent since then. However asking sales prices are up one per cent month-on-month. This is the largest monthly percentage increase seen since before Jan ’08 and May is the second successive month that we have recorded a rise in asking prices.

“Anecdotal evidence of strong interest from buyers is certainly out there, and reflects local market conditions, but as for the bigger picture the improvements recorded are off a very low base. Market activity is still well below average trends. There’s a growing, and, I think, realistic sense that the market is past the worst. Broader economic trends are encouraging but employment is still an issue, as is lending. What we’re looking at now is a recovery in the sense that the pace of the decline is easing, but it’s too soon to say whether the we will bump along the bottom for a while (an L shaped trend) or see a return to more normal conditions (a U shaped one).”

The reality is, housing markets take a lot longer to turn than stock markets and in America, house prices began falling 12 – 18 months before those in Britain – they are still falling at record levels.