May 2009

The search for ‘green shoots’continues

As the Chancellor delivered what was widely received as the gloomiest budget in decades, those in search of the elusive ‘green shoots of recovery’ in the UK economy could be forgiven for failing to notice real signs of life emerging from the UK housing market. Behind the headline figures on falling house prices, tangible evidence of rising enquiries and, most importantly, improving sales, indicates that the industry is in better health than many sceptics would suggest.

Mixed results from house price indices…

Sentiment across the industry is improving, despite another mixed bag of results from the major house price indices. The Nationwide Building Society’s benchmark index dampened the excitement of last month’s rise in monthly house values by announcing a 0.4% fall in prices, although on a quarterly basis its report showed that the rate of decline appears to be easing.

…but enquiries pick up and sales are on the rise

A number of other key surveys suggest that the industry could be getting back on its feet. The latest report from the Royal Institution of Chartered Surveyors (RICS) showed that enquiries rose for the fifth consecutive month in March, and at their fastest pace since September 2003. Perhaps most significantly, estate agents are providing real evidence of improving sales. The National Association of Estate Agents’ latest survey found that agreed sales per month had reached their highest number since November 2007, the third month in a row that sales levels have risen. According to property group Knight Frank, London is leading the charge, with a 91% rise in Mayfair sales on this time last year, an 82% rise in Wandsworth and a 79% jump in Wimbledon.

Black Brick’s view – this early optimism is justified

Of course, the question on everyone’s lips is whether this early optimism will prove sustainable. At Black Brick, we believe we are seeing more than just a temporary upswing in sentiment, particularly in the highly prized prime central London segment of the market where several fundamental supports are reemerging.

Supply shortage could underpin the recovery

Camilla Dell, Managing Partner, explains: “In the most desirable central London locations, properties between the £750,000 to £3 million levels are already attracting fierce competition. Historically there has been a shortfall of good quality properties in this price bracket and over the coming year we expect to see a return to severe stock shortage as buyers fight to secure a bargain before prices head back up. We believe that this fundamental structural issue is likely to be the catalyst for a meaningful and lasting recovery in values.”

30% less stock available in prime Central London

This theme is resonating throughout the industry. The recent RICS survey noted that supply constraints are expected to contribute to the stabilisation of prices, and revealed that the marked increase in interest from new buyers has not been matched by a rise in the number of properties becoming available. Yolande Barnes, director of residential research at Savills estate agency, also cites supply shortage as a reason for buyers to be weighing up opportunities now, commenting: “In a year, getting hold of stock is going to be an issue. If your dream property comes within reach, now is the time to go for it”. And in the past month, Knight Frank has said that stock in prime central London was almost 30% below the level seen the previous March. The group expects the available pipeline to be as much as 50% lower in April and May.

Credit conditions remain challenging…

Of course, it remains widely acknowledged that for a material recovery to emerge in the broader market, mortgage availability will need to improve significantly. On that front too, recent developments suggest that the tide may be turning. Lenders from the Lloyds Banking Group have discreetly begun extending the maximum loan-to-value on some of their new mortgage deals to particular customers, while others have introduced a greater range of deals for borrowers with 10-15% equity.

…but could be easing

The Council of Mortgage Lenders (CML) has also been the bearer of better news on this front, reporting a 16% rise in gross mortgage lending for March. Nonetheless, the CML Chairman has urged caution, pointing out that 2009 is going to be “very very tough” for lenders.

The Chancellor gives little away in the budget…

As the industry struggles back to health, there was little meaningful support from last month’s much anticipated ‘austerity budget’. The government delivered a number of small concessions on areas such as stamp duty, mortgage support and house building, but few of these are expected to have much impact on actual sales activity.

…but negative impact from new 50% tax band should be limited

However, a sharp intake of breath could be heard from those whose interests lie in the prime central London market as they weighed up the impact of the new 50% tax bracket for high earners; a policy that some have suggested could encourage wealthy individuals to sell up and head overseas. However at Black Brick, we believe this scenario is unlikely. “A substantial amount of prime London property is owned by non-domiciled residents who won’t be affected by the new regime” explains Black Brick Partner Karen Goodin. “Given that many UK domiciled high earners will have families and businesses based in the UK, we do not expect to see the higher tax driving them away in large numbers. In fact, with the capital gains tax allowance remaining at 18%, it is possible that people affected by the income tax hike could switch to capital gains investments of which property is an obvious choice.”

The re-emergence of value is key to attracting buyers back to the market

As pessimism gives way to thoughts of recovery, the industry’s high profile commentators seem increasingly willing to talk about timing. Savills’ Yolande Barnes recently observed: “Now is the time to start buying basically because most of the falls have happened. Provided the price has been adjusted somewhere near to 25%, it’s a good opportunity.” Liam Bailey from Knight Frank believes that the re-emergence of value will be crucial in enticing buyers back into the market. “Buyers are willing to enter the market when they see what they think are fair prices. They decide that they can’t put their lives on hold for ever,” he commented. Crucially, Knight Frank is pointing to a narrowing gap between buyers’ and vendors’ expectations, highlighting “clear evidence that we are getting closer to that critical moment in the market cycle when vendors’ expectations coincide with the appetite of potential buyers and sale volumes begin to rise more noticeably.”

Professional buying advice is becoming increasingly important

At Black Brick, we are seeing no shortage of purchasers eager to plunge back in. Camilla Dell comments: “We have seen a sharp increase in enquiries in recent months, which tells us that serious buyers are returning to the market in large numbers. Year to date we have completed over £28 million in property transactions and with stock becoming scarcer, 2009 is shaping up to be a busy year as buyers realise they need help to secure their ideal property while prices are off their peak. We are very proud of the fact that we have saved our clients an average of 14.4% off asking prices that are already significantly down from their market highs.” Increasingly, the difficult market conditions are forcing many would-be buyers to reassess their purchasing process.

Difficult market conditions increase frustrations for buyers in the most competitive sectors

The current market conditions present a precarious backdrop for purchasers, with huge variations in the factors that enable buyers to make a well-informed decision on a property. Many vendors remain reluctant to drop their prices to levels that reflect today’s tougher conditions, a feature that makes it difficult to assess the appropriate value of a property. Furthermore, some prospective vendors are holding off selling their homes until prices bounce back, while others prefer the privacy of a discrete sale and are marketing their properties to just a narrow range of people. This strengthens competition for the most desirable properties in a market already low on stock.

UK domiciled buyers are turning to professional buying consultancies

As these challenges escalate, the profile of Black Brick’s client base has become increasingly home-grown. Typically, most of our clients have been international non-domiciled buyers, but the number of UK domiciled clients on our books has grown dramatically in recent months as benefits such as superior access to rarely available properties and expert advice on the price and prospects of a property under consideration become essential steps in the buying process.

Independence and objectivity are key advantages

“The challenges facing buyers in the most competitive sectors of the housing market are becoming more apparent as the recovery picks up” says Camilla Dell. “A specialist’s negotiation skills can save buyers huge amounts of money in an uncertain market, while a balanced, considered view is essential for evaluating the price that buyers should be paying for a property. Our objectivity is a real advantage. Black Brick remains proudly independent and this status gives us an edge in determining value for our clients.”