UK Property Prices

As property professionals across the UK debate the latest property prices, the likely increase in the numbers of mortgages, the increase in investors both UK and from overseas in January 2009, the temporary low base rate, the potential numbers of first time buyers having enough confidence in the potential versus the possibility of continued falls in prices; one thing above all others appears indefinable - the effect of job losses and the weakening economy on the willingness of the current owner occupiers to take on the task of marketing their property amid the uncertainty.  It seems that they will require confidence in achieving the best price attainable before putting the for sale board in the garden.

Elizabeth Colman from the Times reports on the discussions of a group of Property professionals including Senior Estate Agent figures, RICs, Mortgage advisors and Economists with Kathryn Cooper, Money editor......

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So when will house prices hit the bottom?  

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Money invited a panel of property experts to give their opinions on the state of the housing market. Most see at least some green shoots

From The Sunday Times

February 22, 2009

Elizabeth Colman

House prices still have further to fall but the recovery, when it comes, could be sharper and swifter than people expect, according to property experts.

The Money section invited a panel of economists and estate agents to our offices to discuss the outlook for house prices at a crossroads: while mortgage lending and house prices continue to fall, cash-rich investors are tentatively returning to the market in the hope that the trough is in sight.

The Council of Mortgage Lenders said last week that gross mortgage lending dropped 8% in January to just £12.4 billion - less than half last year’s levels.

However, investors who do not need mortgages are looking for bargains, with inquiries from new buyers rising for the third successive month, said the Royal Institution for Chartered Surveyors (Rics).

Our panel agreed that it may be smart to get in before the bottom, because house prices could eventually rebound sharply.

Nationwide building society's chief economist Fionnuala Earley said affordability is improving more rapidly than in the 1990s, which could precipitate an earlier than forecast recovery.

Mortgage payments as a proportion of take-home pay have fallen 9.4% in the past year, compared with 7.4% over the same period in the 1990s, according to Nationwide.

The bad news, however, is that buyers who bought at the peak in November 2007 may have to wait several more years for property values to get back to where they were - even with a sharp rebound.

Lucian Cook of Savills, the estate agent, was the most bullish of our panel - claiming we have seen the "beginning of the end of house price falls" - but even he said it would take until at least 2013 for prices to return to their peak.

Ed Stansfield of Capital Economics, the consultancy, was the most bearish, pointing out that it could take as long as 20 years to regain 2007 highs.

Here we present their views.

Kathryn Cooper, Money editor: Do you agree with the Rics report that the bottom for house prices is in sight?

Fionnuala Earley, Nationwide: It is too early to say prices have stopped falling. There may be some slowing in the overall rate of decline, but I don't think it’s turning round too quickly. Having said that, as affordability improves, and undoubtedly it is improving, there will be people who can move back into the market in 2009 and 2010.

Lucian Cook, Savills: Our agents are seeing interest from cash buyers. There is undoubtedly more of a buzz this year because there is this expectation that bargains are out there. People are saying we are close enough to the bottom, if we take a 10-year view on house prices.

Ray Boulger, John Charcol: I think there is every indication that the rate of decline in house prices will start to ease. We have seen a big increase in the number of buyer inquiries over the last few weeks. And because of the depreciation of sterling, on top of the 25% or so drop in prices, overseas buyers are getting a further 25% discount compared with a year ago.

Ed Stansfield, Capital Economics: I’m not completely convinced we’re going to see a slowdown in the rate of price falls. Capital Economics has a rather more pessimistic view on the duration of the recession and the amount of time it will take to work off our indebtedness. We think the economy is still going to be contracting and unemployment rising quite sharply even in 2010.

BARGAIN HUNTING

Cooper: Where are investors finding bargains?

Cook: We are seeing cash-rich UK investors and overseas buyers beginning to look at some of the traditional investment markets. They are looking at prime central London such as Kensington and Notting Hill and then in Richmond . They are looking for a market which has traditionally bounced a bit quicker and a bit further.

Cooper: Isn’t that premature? It is only six to nine months ago that we were talking about the prime central market just having started to turn down.

Cook: Yes, but the market has fallen much more rapidly than we have ever seen in the past. Prime central London is down 20% compared with 13% annually in previous recessions. You could argue that house prices falls are probably running a little bit ahead of the economy, because the lack of mortgage supply has constrained the mainstream property market so much.

Simon Rubinsohn, Rics: The southwest London area is where a lot of agents who responded to our surveys were saying they saw the investor and the overseas interest.

Cook: This area saw some of the highest growth, probably fuelled by City bonuses, and some of the quickest falls. It’s banker territory. There is a lack of bonus money - and that could worsen - but it has already opened the market up to people who haven't been able to get in previously, and we expect that to continue, especially as people are displaced from prime London .

Stansfield: What you may have is this investment market gaining ground over the next year or two as people decide they would rather earn 5% on property rather than 0% in the bank.

Cook: I think that the yields of around 5% you are currently getting could set the bottom of the market.

Rubinsohn: In our report the interest came from existing owner-occupiers. The first-time buyers aren’t there in numbers.

RECOVERY

Cooper: So if first-time buyers still aren't coming back, how long will it take the market to recover?

Stansfield: If you take the mortgage approval numbers, even if they go up by 50% or 60% from where they have been in the past three to four months, they are still at levels that prevailed the 1990s downturn. You’ve got to see a 50% or 60% rise just to get back there, let alone to get back to anything you might say is normal.

If in theory house prices rise in line with average earnings, and you think the bottom is going to come sometime next year, then it could be 20-odd years before you get back to 2007 levels.

Cook: We would argue it’s going to be a shorter period to recovery. We are on record as saying house price falls would be capped at 25%. Then we’d see very low growth and we’d see the market bounce back and recover to its levels by 2013.

Rubinsohn: We are doing our latest construction survey and there wasn't an awful lot built in the final three months of the year. While that in itself isn't necessarily a great source of immediate comfort, we have got a shortfall that is not being addressed.

Stansfield: The second you get signs of an economic recovery, you can be pretty sure the Bank of England is going to normalise interest rates.

And I think the government would be terrified of being accused of encouraging people in at a time when interest rates are about to go up by four percentage points to 5%, that kind of level.

Cook: Yes I can see a period where turnover numbers remain low, and having reached the bottom, we have relatively static house prices for certainly a couple of years.

Stansfield: I think we could see another 20% fall. That's conditional on the mortgage market remaining difficult and closed. It's also conditional on our view that the economy is still contracting next year.

Earley (Nationwide) : The sharpness of the fall in prices and how that has improved affordability arguably will mean that people will move back in more quickly. But it does depend on the economy.

Cook: Affordability wasn't nearly as constrained at the start of this downturn as it was in the 1990s. It puts us in a much stronger position for a more rapid bounce back than in the 1990s.

Cooper: So what do we really need to see before we get recovery?

Easley (Nationwide) : One of the things to look for will be when people feel more secure in their jobs. Our consumer-confidence survey suggests this is still some way off - the index is at the lowest since the survey began in 2004.

Boulger (Mortgage advisors): I think what the government should do is to instruct the banks in which it has a large stake to allocate a reasonable percentage, perhaps 15% of their lending, to people who have a deposit of less than 15%.

FIRST-TIME BUYERS

Cooper: What is going to bring first-time buyers back?

Cook: First-time buyers are going to be some of the last to enter the market purely because you’ve got these issues of accessibility to finance that we talked about.

Boulger: I have no doubt we'll see a return of high loan-to-value (LTV) mortgages. The question is how long is it going to take? Banks have got such a limited amount of money to lend, they are focusing on the lowest risk. There is big competition for people with 40% deposits, and reasonable competition at 75%, but until banks have more money to lend, they're not going to go into the higher LTV market. So the key is to get more money in the system.

Earley: The mortgage market has a part to play, but as house prices fall and affordability improves, deposits become less of a hurdle making it easier for first-time buyers to buy.

First-time buyers need to save 15% of the average house price, or about £18,000. When prices peaked, they were raising half that - but the arithmetic will continue to get better as mortgage rates, as well as criteria come down. Also, the cost of keeping a mortgage has fallen sharply owing to lower interest rates - this could help to lessen the effect of the slump.

Boulger: For those who are keen to buy, we should be careful not to put them off. If you buy before the property market bottoms, you are in a much stronger negotiating position. The right time to buy is going to be several months before the indexes show that the market has bottomed out.

BUY TO LET

Cooper: There doesn’t seem to have been the shake-out in the buy-to-let market a lot of people expected. Is that still to come?

Boulger:  Well many of those buy-to-let investors, once they come to the end of their deals, have reverted to a very low interest rate, in many cases a lower rate than their residential compatriots. Mortgage Express reverted to bank rate plus 1.75%, and Halifax to bank rate plus about 2%. So, for affordability, buy-to-let is looking more attractive than a year ago.

Stansfield: I think the problem is the anecdotal evidence, particularly in London , about nasty falls in rent. I'm not pessimistic about buy to let. I don’t think it's going to be the catalyst for the whole boom and bust. Rents will come under pressure, but I expect most landlords will just ride it out.

NOEL BRANSDON, a London solicitor, is one of the cash-rich investors finding bargains amid the downturn. Just before Christmas he bought three two-bedroom flats in Islington, north London , from a big developer who was desperate to sell.

The properties were selling last year for as much as £ 430,000. Bransdon paid £ 250,000 apiece - in cash for one and borrowing for the other two with a deposit of about 50%.

Bransdon, 37, said: "I might have bought at the bottom - I went back to see if I could buy any more and the prices on the apartments had reverted to £ 350,000. I'm letting one at £ 360 a week, and the others at £ 370, a return of over 7% compared with the 2% my savings were earning in the bank."

He has also put his London Bridge flat up for sale - asking  £ 2.3m.