Interesting times…

Legend has it that there is a notorious ancient Chinese curse that says “may you live in interesting times” which, as curses go, sounds like a mild form of punishment but becomes more worrying, the longer one thinks about it. A little like the warning “be careful what you wish for, as your wish may come true”, a dangerous truth can lie beneath an apparently innocuous aphorism.

The fallout from the American “sub-prime” credit crunch has been far-reaching and, at the time of writing, the British government still effectively owns a technically insolvent high street Bank that got caught out in its attempt to lend long and borrow short, and only a very appetising sweet-heart deal is likely to re-float Northern Rock into private hands. In addition, an atmosphere of suspicion pervades the city and none of the big institutions seem certain as to which of their fellow corporations to trust; much akin to an apocryphal game of pass-the-parcel played in a Belfast pub, no-one really wants to win the contents of the parcel or be particularly close the winner, either. All of this has stifled productivity in the city and the big question at the moment is…

How this is going to impact on the property market?

As ever, the answer is probably more complex than can be answered in one sentence or, indeed, one paragraph; the statistics from the Building Societies say that numbers of mortgage approvals are down; property databases such as Hometrack say that average prices are down and the agents report that numbers of sales are down. Mutterings have started in the press about the imminent recession, so at first sight, things would look as black as they are painted.

However, without wanting to appear as if I am galloping up and down the street plaintively shouting “all is well”, if we start to look in more detail at what is actually being said, the picture is less clear; for instance, numbers of transactions in December and January are likely to be down – these are traditionally the quietest months of the year, so not much to be surprised about here. Also, most of the Building Societies exclude any sales over and above 1 million from their figures, as they say that the numbers of transactions are statistically insignificant but the sums involved have a disproportionately distorting effect upon their statistics.

What this means is that these figures tell us next to nothing about either the ‘prime’ country or London markets, but that the run-of-the-mill market has slowed significantly – as well it might with lenders being newly cautious over who they lend to. A cynic might say that had the Banks exercised a bit more caution earlier, we might not be in the grip of a credit squeeze now, so it does feel a bit rich to hear plaintive cries from the Banks that the numbers of mortgage approvals are down.

Many of the authoritive residential property databases work out an average price of newly registered houses for sale and, if there has been a preponderance of cheaper houses registered that month, average house prices will be seen to have fallen. This tells you more about the quality of the stock available at any one time than it does about price trends for specific types of houses.

Having established what is not happening at the moment, it now rather begs the question as to what is actually happening in the prime central London market.
Aside from the wider national economic picture, one of the few things that would fundamentally change the dynamics of the London market would be a sudden increase in the supply of property for sale; this last happened briefly in October 2001, however normal business was restored by the beginning of 2002. The last serious, lasting change in the supply/demand curve took place in the late 1980’s (a full two years after the stock market crash of October 1987) where a happy abundance of family houses swiftly turned into a glut, which took three years to clear up. Whilst at the time I didn’t know what was being alluded to, I still vividly remember an article in “Country Life” in 1989-90, the title of which was “Here come the houses”; everyone who had been thinking of selling up and cashing in all decided to do so at the same time and the effect was transaction grid-lock.

As someone who spends the bulk of his working day driving around London on a scooter looking for houses to buy – year in, year out – I can confirm that good property in the prime areas of London is as tough to find as it ever was. At least 5 houses over 5 million in Kensington and Chelsea sold during January (a time of year not famous for a lively market) and one particular house changed hands for 11.5 million before it came to the open market, which, in itself would have been unsurprising, were it not for the fact that this self-same house had changed only a year previously (in the same condition) for 9 million. A flash in the pan? Perhaps, but what is true is that good houses continue to sell. However, what has changed is people’s willingness to pay a new, groundbreaking price for the house of their dreams and anyone trying to sell a house for 20% too much may well be in for a long wait; boringly, this may well be the shape of the market for the coming year.

Paradoxically, in central London the atmosphere of financial caution may well actually stifle the supply of good family houses and, those that come to the market, will be closely fought over by agents keen to grab a larger slice of a shrinking cake. The tactic used by unscrupulous agents of naming a higher figure than the opposition, in order to ‘buy’ a new instruction – and thereby market share – is cynical and well worn, but depressingly effective. Out of an almost full book of clients, I am probably not alone in currently having several who, whilst they are prepared to buy a house today, won’t pay a spurious price in order to do so. Hence my feeling that this may prove to be a surprisingly un-dramatic year where vendors and purchasers scowl at each other, often separated by a gap in price expectations of between no more than 5 & 10%, which at the time will seem to all concerned like an unbridgeable chasm.
Where the central London property does look depressed is in the buy-to-let market; the short term outlook for the prices of imperfect properties in less than prime locations is now pretty gloomy and, due to a change in tax laws and deteriorating rental returns, we may see a long and disorderly queue form at the exit from this particular investment vehicle.
It is perhaps ironic the problems of 1990-93 were years where we, the public, got ourselves into trouble, whereas this time around it seems to be the Banks who have got themselves into trouble, or should I say into “interesting times”.

Saul Empson, Director – Haringtons UK Ltd, Spring 2008

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