The queues outside Northern Rock may have gone, yet slowly but surely the air
seems to be coming out of the British property market.
Economists at mortgage lenders and the research departments of leading estate
agents were last week scaling back their forecasts of house-price growth
after figures from the Royal Institution of Chartered Surveyors (Rics)
showed that prices dropped in August for the first time in two years, while
the number of new buyers fell to its lowest level in three years.
A combination of turbulence on the financial markets, five interest-rate rises
between August 2006 and July this year – from 4.5% to 5.75% - and the laws
of gravity, it seems, are taking their toll. The only fillip for the market
was provided by the decision, on Tuesday, by the Federal Reserve, the
American central bank, to reduce increase rates by half a percentage point
to 4.75% – the first cut in four years, and the biggest since 2002 -
fuelling speculation that the Bank of England would soon follow suit,
restoring much-needed confidence to the wobbling British market.
“We are witnessing a ‘rabbit in the headlights’ reaction,” says Max Ziff,
chief executive of the estate agency Humberts. “It will be a month or two
before we can accurately measure the impact of this week’s developments on
the property market.
“We will see an early correction in prices, but not a crash. While prices will
inevitably fall, the impact will be heavily skewed towards the lower end of
the market and the big conurbations, where properties tend to be purchased
with higher proportions of debt.”
Disentangling seasonal effects from underlying housing-market trends is not
easy, but, nationwide, the market has been cooling all year, with prices
down in some areas. Even London, the motor of recent growth, is not as hot
as it was.
In its latest monthly survey, the property website Rightmove reported that
average asking prices in the UK fell by 2.6% in the month to mid-September;
in the capital, prices dropped by 2.5%, prompting fears of a rerun of the
slump of the early 1990s.
Rics believes the shockwaves following the “credit crunch” problems that began
in the American sub-prime markets, coupled with consecutive monthly falls in
buyer inquiries, are enough to dent even the top end of the London housing
market, and says there is a “one in five” chance that prices in the capital
will fall by 10% over the next 12 months. It has also scaled back its
forecast for 2008: rather than rising by 3% next year, it predicts, prices
will stay constant.
“Our view is that by the end of next year, you will see flat year-on-year
growth,” says Simon Rubinsohn, chief economist at Rics. “That is not a fall
in prices, just a gradual ease-off.”
Hari Sothinathan, a senior analyst in the residential research department at
the estate agent Knight Frank, predicts 5% growth for the remainder of the
year. He believes, though, that even the most optimistic economists will
start to revise down their forecasts for 2008. “All the indicators suggest a
slowing market,” he says.
Last week, Vincent Cable, deputy leader and Treasury spokesman for the Liberal
Democrats, added to the gloom.
“From Dutch tulips to dotcom shares to Japanese land prices, and now UK house
prices, we see banks and individuals entrusting their money to a market that
seems to offer a one-way bet,” he told his party’s conference. Cable was
keen to call an end to the “frenzied signs of collective madness” that have
led to years of spiralling house-price growth and stretched affordability.
In America, meanwhile, Alan Greenspan, the former chairman of the Federal
Reserve, also predicted that Britain’s housing boom would soon be over.
“It’s going to turn, it’s got to turn,” he said.
Douglas McWilliams, founder and chief executive of the Centre for Economics
and Business Research (CEBR), thinks the UK market has turned already. The
latest quarterly Chesterton meta-index, which he produces for the estate
agency of the same name, showed overall house-price inflation of 10% - but,
while the top 20% of the market grew by 14%, the bottom 20% saw growth of
only 7%. He expects the next index to provide further evidence of a slowdown.
“It is clear that mortgage lenders such as Alliance & Leicester,
Bradford & Bingley and HBOS will want to scale their loan books back,
and house-price growth will go into reverse,” McWilliams says. “We will get
negative numbers, perhaps as much as 10%. But the largest falls will be in
transaction numbers, which could fall by as much as 20% to 30%, as they did
during the last recession.”
McWilliams warns against overdramatisation, however. “It will only be a
temporary slowdown, lasting one year, not like in the early 1990s, when it
lasted five years,” he says. “In the medium term, it is all good news.”
So, are we simply talking ourselves into a recession with all this talk of
crises and price crashes? Rubinsohn remembers when, three years ago, a
combination of negative articles in the press, an IMF report claiming
British housing was overvalued and comments by the Bank of England conspired
to create a negative mood.
“It led to a sharp slowdown in the market,” he says. “It turned the mood,
which then turned prices – but only temporarily.”
At the time, again, the underlying economic fundamentals of strong growth,
with low unemployment and interest rates, prevailed, and the market returned
to its upward path. The question is, will the same happen again?
Rabbit in the headlights? What's behind the headlights, I wonder? Do you feel lucky?
John, London, UK
Clive, Sussex. I believe there is a valid argument that the housing market is sustainable at this time. There are several factors driving the market forward i.e. low inflation/low interest rate economy, inherited wealth, obscence money being made in city being invested in housing, population outstriping supply, banks supplying ever longer mortgages (lifetime mortgages!!), Uk as a desireable place to live therefore bringing in foreign money etc which have all contributed to the rise in house prices. i agree that housing cannot continue to rise significantly above inflation in the long term without other driving forces, but that is not the current situation and the market still has a way to go i believe. I believe we will see a softening of the market for a few years but think a widespead crash is unlikely. I dont belive the bank of england would risk a downturn and will adjust interest rates accordingly hoping for more modest increases without the feared recession
Jackboy, london,
Maybe I'm being supremely ignorant, but could someone please explain how falls in price in "lower end of the market and the big conurbations" can fail to effect the rest of the market? Who exactly is going to be trading up from this "lower end" into the rest of the market if the "lower end" has died on it's feet.
Unless there are lot more Russian oligarchs and Range Rover driving derivatives traders than previously thought, or there's a ship full of property-mad Martians just waiting to buy every four bed detached in Esher, the notion that one end of the market can move while the rest remains unaffected strikes me as exceptionally fanciful.
Mark, Cranleigh, Surrey
Jackboy, london. I find this logic very strange. There is no real economic basis for the astronomic price rises in recent years - other than a speculative bubble - so a fall of 40-60% would do no more than return prices to where they should be based upon incomes. You seem to have fallen into the trap of assuming that whatever the price is now is somehow the 'right' price, more or less a few percentage points. The 'right' price is simply what the market will bear and the market at present is looking extremely vulnerable. Northern Rock shares have fallen by 75% in recent months, would you have predicted that or said it was highly unlikely if asked a few months ago? Whether the wider economy will suffer when the property market collapses - the market doesn't care. We've been led up this path by Brown but he and his Government have now lost any real control. The property market is on it's way down in a big way and there's nothing we can do about it except ride out the storm!
Clive, Sussex, UK
To say the housing market is overpriced by 40-60% is crazy. Living in London is not just about how much it would cost to build a place, it's the location too. You might be able to knock up a £200,000 house for £120,000 which leads to these ridiculous statements, but if that's the case then why don’t people go and live in an isolated part of Scotland instead of London or a big city. Here they could build their own house for 60% less than they'd pay in London. A housing crash, like in America, is a loss of about 10%. If people are expecting a 60% reduction then i don’t really think that's gonna happen and if it did it would be disastrous for this country and our economy.
Jackboy, london,
I have always been amazed how the blinds are leading the blinds when it comes to property. People, who have their highly leveraged properties to thank for much or their wealth, seek reassurance from statistics and forecasts issued by real estate agents and lenders... I tend to think Mr Greenspan knows a thing or two about bubbles...
Thomas, London,
It is now widely accepted that UK property is over-priced by 40-60%, depending on location. The crash in the US was predicted by economic academics 2 years ago. They also predicted UK property would follow 6-12 month after. I'm with them, rather than "journalists" who appear to be no more than cheerleaders for the vested interests in keeping UK property over priced.
Jim Cracker, London, UK
Does it matter if property prices go up or down ?
Assuming you can afford where you live and property prices go up by 10%, you will still pay the same. If prices drop by 10%, you will still pay the same.
If you decide to move and property prices have gone up by 10% your new home will cost 10% more. If prices drop by 10% your new home will cost 10% less !
The only winners from increasing property prices are Speculators and Estate Agents. The losers are first time buyers.
The only losers from falling house prices are Speculators !
andy, manchester,
Joe, you call investors greedy buy to let speculators but the reality is these people often buy in cheap undesirable locations, rennovate and plough money into the area raising it generally, then move on to other poorer areas. Would you rather live in a crumby flat in a crime ridden area for £150,000 or an immacuately decorated flat in an up and coming area for £170,000? Other investors are people who have lost faith in all pension schemes.
Why not blame the city boy's making obscene money and paying over the asking price for property? Or people getting left a house or money through inheritance therefore having more to spend. It's easy to blame Buy to let'ers cos they've had a negative press because *SOME* have made a lot of money in the past. The reality is a strong rental market is needed in this country for us to be strong economically and there are plenty of more signifcant factors fueling the housing market you should be ranting about
Jackboy, london,
it is reminiscent of the last crash. the vested interests daily propaganda are changing.not too long ago there was talk of slowing prices(but not zero growth). then talk of zero growth(but not falling prices). now there is talk of falling prices(but no crash).not long now, i feel.
les, plymouth, uk
who do you beleive? Alan Greenspan or the banks/ estate agents and their various advisers / research departments?
I think I know which one has more real understanding of (the big picture) whats happening at the moment.
Mrs A, London,
All this talk of strong growth and rising employment is so much hot air. In the last major recession 1989-1992 a correction in the property market led to a fall in employment and growth. When an economy is based on ever increasing lending secured against falling asset prices unemployment starts with building trade, retailers and so forth until the correction has fully taken hold. The strength of the domestic economy has been stoked up not by demand from real earnings but by credit. Unemployment will bite harder than before, The recent mass immigration especially from Eastern europe has provided large numbers of quality workers who will not be the first but the last in the unemployment line, adding to the possibility of internal political tensions and unrest.
Christopher Sly, Brighton, E Sussex
This country needs a significant correction in its "home" market which hopefully does means financial disaster for the greedy buy to let speculators who have put the basic price of family accomodation well out the reach of people of the age to have a family. Yes there will be other nasty consequences to a crash but Gordon should have thought about that before encouraging the irresponsible lending that fuelled this boom in the first place. The consequences of no crash are far more horrifying in my opinion.
Come on... The party has gone on long enough now. Time to think about the real social impact of treating homes as investments and an opportunity to force hardship on the younger generations.
Joe, Birmingham,
Regardless of what is being said, there are many markets in the UK not just one. The demographic shift is creating a rise in the city centre living where there is a huge supply-demand inbalance. For as long as this continues, particularly for London, there can be no talk of decline unless there is a surge out of the city or they find land from the middle of nowhere which they can build a million houses on.
The press do this economy no favors by installing scare tactics into its headlines. The sucess of a housing market is partly contributed by a confidence in the buyer. Remember the key facts. The economy is doing well and we don't have enough properties for everyone. The city market will grow, the question is by how much...
RICHARD SEPHTON, London,
How can we NOT be heading for a slump, having already reached the ridiculous situation where it is now feasible for someone to sell aproperty the size of a telephone kiosk in many areas (esp. in the SE) and to use the proceeds to buy Perthshire, or the Isle of Wight or whatever.
As Sgt. Fraser has been telling us for a generation and more
"We're Doomed I Tell Ye...........DOOMED"
Hamish Morrison, Edinburgh, SCOTLAND
The underlying economic fundamental of strong growth, low unemployment and low interest rates are dependent upon, guess what, debt and house prices. The era of cheap, easily-available credit is coming to an end. The UK economy is debt-ridden. How long will it be sustained without cheap, easily-available credit? As house prices fall, our consumer-driven economy will be reigned in as people no longer feel wealthy enough to take on yet more debt. Those who are at the extremes will fall first and find they have to sell their home quickly; this is a Forced Sale. ie the owner accepts a lower price then he/she would otherwise like to. House prices fall further and a vicious circle is entered. (This is why Japanese House Prices have fall or stagnated for 17 years. Japan: A large population then the UK but with far less space for housing because it is so mountainous.)
As confidence in the UK house market fails, so will the economy. A miracle built on sand.
NickT, Aldershot, Hants,