March 2009

Winter chill, or green shoots? Monthly house price indices give a confused picture…

The UK mortgage giants have parted company in confusing fashion early in the year, with Nationwide’s 1.8% fall in monthly house prices in February contradicting a surprise 1.9% rise reported by Halifax’s latest available figures. Some analysts have dismissed the Halifax’s reported monthly rise as a statistical blip, but its appearance serves to highlight the confusion that serves as a backdrop to today’s market.

…but a sharp increase in new buyer enquiries suggests the market is thawing

One feature on which both mortgage groups agree is the rising level of interest from prospective buyers. Nationwide offers a more upbeat assessment than in previous months, with Fionnuala Earley, Nationwide’s Chief Economist commenting: “Early signs of increased interest in housing, as reported by the pick-up in new buyer enquiries, have yet to filter into sales, but do suggest that falling prices and interest rates are raising curiosity now, which could flow through quickly once confidence returns.”

A recovery in sales transactions may not be far behind

The key issue for the UK property industry is when these enquiries will translate into transactions. The Royal Institute of Chartered Surveyors (RICS) provides some insight with its new buyer enquiries series, a survey which has now posted three successive monthly increases and which has historically been a reliable lead indicator of transactions in the housing market. The RICS attributes increased buyer interest to a combination of recent interest rate cuts and declining house prices, which they say has boosted affordability.

Estate agents are reporting a sharp rise in offers

Meanwhile, estate agents are reporting that in the most expensive areas of London, interested parties are beginning to make offers. Hamptons International say that they took six times the number of offers on properties last week than in the quiet weeks of last year, while Savills’ Knightsbridge office reports a 50% rise in offers this month compared with the past few months. Winkworth says it has had five buyers competing for the same Notting Hill property while Knight Frank has seen more buyers come through its Chelsea office in the past six weeks than in the previous four months – a number of them making offers on local properties.

The beginning of the end? Industry experts say further falls to come…

But whilst tangible evidence of activity is emerging in some quarters, most industry commentators expect price falls to continue for at least part of this year. Knight Frank’s prime central London and mainstream UK market indices show that prices have already fallen around 20% from their height and the group anticipates a further 10% decline this year. Similarly, estate agent Cluttons expects central London house prices to fall by 11% in 2009, resulting in a potential 29% fall from peak-to-trough, while Savills have reiterated their opinion that peak-to-trough UK house price falls should be contained to 25%.

…but 2009 should see prices hit the bottom

Nonetheless, the experts are signalling loud and clear that this year will be a critical turning point, by daring to forecast the bottom of the market. “Whilst we accept that another boom is a very long way off, 2009 is likely to be the year that prices hit the bottom and when sales volumes begin their slow recovery” says Knight Frank, pointing out that in many areas, investors and occupiers are sensing the emergence of good value. Cluttons and Savills both predict a marginal return to growth in central London in 2010. “Diverse levels of equity means prospects for an upturn (in prime markets) are greater than in mainstream markets. We expect they will see an earlier recovery.” says Savills Director of Research Yolande Barnes.

Pent-up demand could kick-start a recovery as affordability increases

As enquiries rise, the nature of potential buyers is coming under intense scrutiny. Some commentators have pointed to an underlying pent-up demand for homes from would-be purchasers who have been waiting patiently for an entry point into the market. Rather than being first-time buyers, who remain constrained by the freeze in the mortgage markets, these are typically people who need to move due to changes in personal circumstances, or who have considerable equity built up in deposit accounts but have been waiting for prices to return to more affordable or realistic levels. Agents say they are fielding a rush of enquiries from buyers who fit this profile and that such buyers are not only viewing properties but appear increasingly willing to make offers.

Cash buyers have a key advantage…

In the current circumstances, cash buyers continue to hold all the cards. Lucien Cook at Savills says: “In such a low volume market, the bottom is likely to be set by the cash rich, whether they be investors driven by yields or owner occupiers who look to ten-year house price growth prospects whatever the short term outlook.”

…and are influencing the shape of the market:

The Black Brick view

At Black Brick Property Solutions, we are seeing the influence of cash buyers firsthand. Managing Director Camilla Dell says that the landscape in London has become increasingly competitive since the beginning of the year. “Enquiries from our potential new clients are up 47% on the same period last year, so we know that cash buyers are actively looking and are serious about completing deals. Increasingly we are seeing the best properties attracting multiple bidders and we are having to battle hard to secure preferential terms for our clients. For the first time in many months we are coming up against cash buyers who can move extremely quickly and who, in today’s challenging climate, will be preferred by vendors over buyers taking out a loan. For the best properties, particularly those that are priced well to sell in the current conditions, we don’t have the luxury of time to enter a prolonged negotiation period and we are recommending that our clients be prepared to make decisions quickly.”

Auctions are attracting cash-rich savers looking for higher return investments than deposit accounts

Many such buyers are already surfacing at auction houses, which have been welcoming high volumes of bargain-hunters eager to test the discounts on offer. Christopher Coleman-Smith, chief auctioneer at a recent Savills auction, says that heightened interest could be due to prices beginning to bottom out before the rest of the housing market. “Auctions, unlike agents, are usually ahead of the market and prices were already down about 25-30% towards the end of last year,” he says. “I think we are going to get to that flat level fairly soon.” The Savills auction team says that many cash-rich buyers have been hit by low interest rates so are anxious to invest their money in assets with higher rates of returns. They also cite the increasing numbers of local investors attending their auctions, in place of the big developers who typically used to make up the audience.

Weak pound continues to attract legions of high net worth international buyers

Of course, the greatest excitement in the prime London and home counties sectors continues to come from the welcome presence of high net worth international buyers. Such buyers are enjoying spectacular discounts as the prolonged depreciation in the pound magnifies the significant falls already seen in values of prime properties. Hamptons International recently reported that prime central London alone saw a 20% jump in the number of international buyers in the final quarter of 2008 compared to the same period a year earlier.

Regardless of currency fluctuations, prime London property remains a highly prized asset

But with some economists predicting that both the euro and the dollar could weaken against sterling as the recession in those regions deepens, will the flurry of investor interest in prime UK property come to a halt? Research group BH2 suggests that even if sterling weakens from here, the UK will look increasingly attractive to international residents whose own economies are worsening. BH2 argues that as recessions elsewhere deepen, sterling and sterling-denominated assets are likely to be seen as an attractive option in any wealth diversification plans of foreign investors.

And Knight Frank reiterates the qualities that the world’s wealthy have long sought out in the capital, none of which should be impacted by the recession or level of sterling. “Many of the reasons for the super-rich opting for the UK’s capital remain unchanged. Its private schools and universities remain among the very best in the world. The non-domiciled taxation benefits are largely intact, and London still offers a cultural, leisure and business life that other tax-efficient locations cannot hope to match.”