December 2008

The onset of the festive period has given little seasonal buoyancy to UK house prices. The major data providers have this month continued to report on price falls across all sectors of the market, painting a bleak picture for vendors in need of a sale but who now appear to be swimming against the tide. But whilst many in the property industry anticipate a leaner Christmas, others are looking ahead to the tantalising opportunities that the New Year promises to bring.

First, the latest industry news. The most recent statistics reflecting the health of the property sector are somewhat contradictory. The gloomiest reports have concerned the UK economy where, despite interest rates falling to just 2.0%, a raft of data points to a prolonged and severe recession. Against this background, property prices were unlikely to surprise on the upside. But while most sectors have generally continued to decline in value, surveys from a number of major organisations have unexpectedly declared that the steep slowdown in prices may be levelling off. Figures from the Land Registry showed a 1.5% fall in house prices in October, compared with falls of 2% in the previous two months, while the bellwether Nationwide survey for November reported a drop of 0.4%, a significantly lower rate of decline than the 1.3% fall seen in October. However, not all the major lenders were in agreement. For the first time in several years, the Halifax Building Society’s survey was out of step with its counterpart, the Nationwide, reporting a far gloomier 2.6% fall across the country in November.

But one irrefutable fact amidst the slew of statistics is that Prime Central London property remains at the eye of the storm. The sector recently recorded its second largest fall on record, a decline of 3.6%, bringing annual growth to a staggering -14.3%. This was the lowest rate since the index began in 1977. And within Prime Central London, the downturn appears to be more indiscriminate than in the past, with previously resilient houses falling by 4.1% in November compared with a 3.2% drop in the value of flats. Whilst ‘super-prime’ properties (those worth more than £10m) had continued to rise in value until the late summer, they are also on the back foot. November witnessed the third consecutive month of price declines in this exclusive category.

Geographically, however, London property remains as diverse as its population. This month, the boroughs of Hackney, Lambeth and Lewisham fell by as much as 3%, while the more expensive borough of Westminster, home to some of the most desirable properties in the Prime Central London market, saw a drop of just 0.3%. These diverging fortunes reflect the time-honoured appeal of areas such as Mayfair. Liam Bailey, Knight Frank’s Head of Residential Research, comments: “As many prime properties are unique and only occasionally come up for sale, we believe activity will increase as overseas buyers realise the home they have had their eye on for some time is now available at a much reduced price.” But despite its overall relative resilience, even Mayfair is currently offering significant discounts for buyers who look hard enough. Camilla Dell, Managing Director of Black Brick Property Solutions, points out that for the first time in many years, repossessions are coming up for sale in this exclusive area. “We have seen five prime properties come up for repossession in Mayfair in the past few weeks – a situation that is virtually unheard of. Buyers who are in the right place at the right time may be able to clinch an exceptional deal on a property that rarely comes to market.”

The prospects of Prime London will also be influenced by what is happening in property hotspots outside the UK, where there is increasing evidence that many of the past decade’s strongest overseas markets are braced for difficult times. The Knight Frank Global House Price Index recently recorded its first ever quarterly fall in prices of -0.3%. Prices in more than half the countries surveyed fell over the third quarter, a trend that the group expect to continue as the year draws to a close. In particular, Dubai, the stellar performer of recent years, is causing concern amongst industry experts. Arabian Business recently sent shock waves through the industry when it reported that Palm Jebel Ali’s island prices have depreciated around 40% in the past two months, blaming the sudden drop on current investors liquidating their assets in order to maintain cashflow during the global financial crisis. Knight Frank highlight a sudden shift in Dubai’s balance between supply and demand, pointing out that they expect Q3 figures for the country to show a substantial slowing in growth. Morgan Stanley echoes this with predictions that Dubai will gradually decline by up to 10% in 2010. The difficulties being faced by many global locations bring the attractions of London sharply into focus. Many in the industry expect that the qualities traditionally valued in London by the world’s wealthy will prove more durable in these difficult times than those of many other centres.

So when do the experts expect interest in the UK market to reawaken? Whilst the number of transactions has continued to fall, there are suggestions from the mainstream sector that potential purchasers may already be dipping their toe in the water. Royal Institution of Chartered Surveyors (RICS) spokesman Jeremy Leaf pointed out that buyer interest increased last month for the first time in two years. “Many are starting to see the current market as an opportunity to purchase a previously unaffordable property”, says Leaf, although he notes that job confidence will have a strong influence on people’s willingness to obtain mortgage finance. A further positive sign may be the number of mortgages being taken out. In October these jumped by 14%, albeit from a very low base. One factor that looks set to unleash overseas buyers onto the UK market is the falling UK currency. Liam Bailey explains that the combination of house price falls with a weak pound is proving hard to resist for the wealthy international community. “A fall of 15% may translate to a fall of as much as 35% to someone watching the market from the USA, as the pound has fallen by 20% against the dollar since the beginning of the year. There has been an increase in interest from such buyers over the past few weeks, which has not yet been translated into activity.”

And closer to home there are signs that interest, particularly in the beleaguered prime markets, is brewing amongst UK residents. Camilla Dell says that her team at Black Brick are ready for a bumper 2009. “We are taking calls on a daily basis from existing and prospective clients wanting to know if this is the right time to jump back into the market. The really interesting feature is that it is not just international clients expressing strong interest; we are receiving just as many enquiries from UK domiciled buyers who have been living in rental accommodation for a number of years but feel that great bargains are available now. We remain very close to the market and are finding that as repossessions rise across all areas, auctions are becoming increasingly interesting places to find high quality properties at steep discounts.”

Dell says the question her clients want answered is when to buy – now, or in six months’ time when the market may have fallen further? “At Black Brick, we always seek to achieve the deal that is right for our clients, regardless of how long that takes us. But in these fast-moving markets, our advice is clear: start looking now, but be prepared for a long negotiation period. Many vendors continue to have unrealistic price expectations, so our strategy is to start with an offer that reflects the current conditions and wait for the vendor to come down to that level. And timing is critical. We are already seeing investment buyers signing exceptional deals that in six months’ time will be harder to find. Furthermore, buyers who start looking today can take advantage of a powerful negotiating position because of the unusually high number of properties to choose from. This position will weaken when we begin to see streets or specific areas with just two or three available properties instead of a dozen.”