November 2009

The Christmas lights in London’s Oxford Street may already be on, but there are few signs of a festive slowdown in its iconic W1 postcode or elsewhere within the UK capital’s prime property market.

Indeed, prime London and the South-East of England continue to lead the rally in UK house prices as confidence that interest rates will stay low well into 2010 help buoy homebuyer sentiment. We have detailed the lack of supply many times this year in explaining house price rises despite an uncertain economic backdrop and make no apology for doing so again when it remains such a key factor. Taken in context with a higher-than-usual proportion of cash and equity-rich buyers – prices continue to rise.

Further gains for UK house prices

The broad-based Nationwide House Price Index posted a 0.4% rise in October after September’s 0.6% gain. According to Nationwide, house price inflation has now turned positive for the first time since March 2008 with prices some 2.0% higher. Halifax reported an even stronger rise for October than Nationwide with a 1.2% increase, citing tightening market conditions for the rise. The bank said the sales-to-stock ratio, which compares the number of completed housing transactions in a month to the overall number of houses on the market, rose to its highest level in October since December 2007.

However, Halifax’s housing economist Martin Ellis says that “there are some indications that more people are deciding to put their homes on the market, encouraged by the recent improvement in market conditions. A continuation of this trend could help to improve the balance between supply and demand, curbing the strength of the stimulus to house prices resulting from the current imbalance.”

Tentative signs of easing credit conditions

The key to the overall health of the market are the terms on which those in need of finance can borrow and there are encouraging, if tentative signs of improvement here too. Several of the UK’s largest lenders have dropped rates for high loan-to-value borrowers in recent weeks while the government’s plans to create three more high street banks is obviously intended to facilitate lending and create more competition in the mortgage market.

Encouragingly, the latest figures from the British Bankers’ Association (BBA) also point to nascent signs of easing credit conditions. The BBA’s late-October release shows the number of loans approved for house purchases from the major high street banks rising again in September and back up to levels last seen at the end of 2007, albeit that overall loan volumes are still well down on peak levels. According to the BBA the average house purchase loan (as opposed to remortgage loans or equity withdrawal) is 7% higher than a year ago – reinforcing the positive backdrop for house prices in recent months.

Confidence rising

Consumers’ house price expectations are, unsurprisingly, an important and generally accurate lead indicator for actual house price changes. Improved confidence is leading to an increase in new instructions, with a positive net balance of surveyors reporting an increase in new instructions according to the Royal Institution of Chartered Surveyors (RICS). The net balance of surveyors reporting rising rather than falling prices was positive for a second consecutive month.

London leading the way

From a regional perspective UK price gains have been strongest in London and the South-East. Rising City bonuses and prime central London’s many attractions as a long-term investment are underpinning strong demand. According to RICS data “prices rose the fastest in London and the South East while four regions still have a negative price balance”.

Savills recent prime market update highlights the strength in prime London in particular, saying prime central London prices rose 4.0% in the three months to end-September, leaving prices some 16.6% from their peak. Interestingly, Savills notes prices have been strongest in South-West London (Fulham, Parsons Green, Richmond) driven by pent up demand from UK nationals, mostly in the financial sector, looking to buy or upgrade their main family home. Savills say prices in prime South-West London jumped 8.4% in the calendar third quarter, leaving prices in the area 2.5% higher than a year ago but still 14.4% lower than their peak.

Bonuses are back – despite government’s best efforts

We expect financial sector bonuses to further support prime London property prices in the coming months. The government’s attempts to clamp down on bonuses appear to be largely toothless – there may be no cash bonuses for higher earners this year at either Lloyds or Royal Bank of Scotland but payouts from the major investment banks and hedge funds are expected to be strong after a return to profitability. We expect a portion to be spent on prime London property.

According to the Centre for Economics and Business Research, City bonuses will total some £6bn this year – up 50% from last but down some 40% from 2007. Even if a higher-than-usual proportion of this £6bn is paid in equity or other non-cash forms, we expect financial sector bonus beneficiaries to trade up or to use property as a hedge against long-term inflation via buy-to-let. Indeed, at Black Brick we have had a number of enquiries in recent weeks from employees in the financial sector looking to upgrade.

Black Brick 2009 Review

Looking back on 2009 to date it is fair to say that the strength in house prices since the spring was not widely predicted at the start of the year. Few, if any market commentators deviated from the consensual view that prices would continue to fall in 2009.

At Black Brick, our clients started the year understandably nervous given the collapse of Lehman’s and very real concerns that the financial crisis could yet deepen. But as governments and central banks worldwide provided a coordinated response, confidence began to creep back into the market.

Camilla Dell, Black Brick Managing Partner, says: “From about March, we started to see significant interest build, led mainly by international buyers looking for a deal and to take advantage of the weakness in sterling which effectively gave them close to a 50% discount off peak property prices.

“Where some go, others surely follow, and the market quickly became dominated by buyers, foreign and domestic, all looking for a deal. At the same time stock levels remained extremely low and we soon saw the return of sealed bids and ‘gazumping’.”

“Activity has consistently been the strongest at the lower end of the prime range – £800,000 to £2.5 million – and there is currently a severe lack of supply in prime central London in this part of the market. Against this backdrop, prices have risen consistently to the point where UK house prices will end 2009 higher than they started – a position few would have dreamt possible as they digested the implications of the worst financial crisis since the 1930s at the close of 2008.”

Looking forward to 2010

While the London market has had a good run, we don’t see it being more vulnerable to any further downturn in economic activity or asset prices.

If anything, we believe conditions for prime central London are better than elsewhere in the UK. The very conditions that have supported prime London prices – namely a shortage of supply and a higher than average proportion of cash and equity-rich buyers are secular not cyclical supports.

Increasing institutional demand for prime residential property also looks set to be a feature in 2010 and beyond. Two new funds specifically targeting residential property opportunities in prime central London are currently being marketed. As well as reinforcing the notion of long-term value currently on offer, the funds will also obviously provide added support to prices.

Looking forward, we believe that unless the recession continues well into 2010, there is no reason why house prices should retrace. That said, we still believe a note of caution is warranted. After all, unemployment is still rising and while credit conditions are easing relative to where they were most banks remain reluctant lenders to all but the very highest quality credit.

We see the main risk to house prices as being a sooner-than-expected hike in interest rates, but would put a low probability on such an outturn given the general economic backdrop and recent rhetoric from Bank of England officials. Despite the cash rich nature of the majority of buyers in prime central London, there is an argument that this segment remains vulnerable to rising borrowing costs. Camilla Dell comments:“At Black Brick we have seen firsthand evidence of big investment landlords holding onto properties only because interest rates are so low. When interest rates do finally rise, a number of properties could well be forced onto the market.”

Black Brick News

Due to Black Brick’s continued success we have further strengthened our team and are delighted to announce the arrival of a very experienced Senior Buying Consultant, Grant Aitken.

Grant has an extensive knowledge of the prime central London and wider markets gained from his time as a Director of Chesterton Humberts and managing successful estate agency offices for Foxtons and Hamptons International. Grant has worked closely with both high net worth and corporate clients and has gained a thorough understanding of how to secure the best deal for his clients whilst building a reputation for discretion and integrity.

Grant is married with one daughter. When not spending time with his family, Grant enjoys playing a wide range of sports including golf and tennis, he is also a keen skier.