Spring Property Review

Edward D'arc's Derek Fletcher gives his view of the local market

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At last, spring is finally upon us and with it has come a flurry of activity in the Chiswick residential property market. The question on the lips of all those concerned is; are we seeing the first signs of a recovery in the local housing market or is this just another of those blips amid the plethora of confusing headlines and statistics rolled out by the so called experts, mortgage lenders, and the Land Registry alike?

In reality, despite the recent and possibly short lived burst of activity, the overall volume of property transactions is considerably below that seen two or three years ago at the peak, and well below historic levels experienced over the last ten to twelve years.

The fact is property prices have risen well ahead of incomes, consistently and for an unprecedented period, since the mid 90’s. Indeed by 2003/4 the House Price Earnings Ratio (HPER), one of the most accurate barometers/indicators of the true state of the housing market, had reached levels substantially above those experienced in 1988, the start of the last major property crash. First time buyers, traditionally the drivers of the housing market, were particularly hard hit by rising prices and despite interest rates falling gradually (from levels averaging 12% during the 80’s) by 2004/5 demand had pushed the average price of a one bedroom flat in Chiswick to almost 10 times the national average salary.

During the same period fundamental changes took place in the private rental sector that have had a profound effect on today’s residential property market. The collapse of confidence in pension providers during the mid 90’s, combined with falling deposit rates and a shaky stock market, left many people seeking alternative forms of investment income to those traditionally associated with long term pension provisions. Bolstered by the 1992 Housing Act providing greater security for landlords and with attractive yields, initially approaching 10%, the ‘buy to let boom’ took off. This created even greater demand at the lower end of the property market, pushing prices of one and two bedroom apartments even higher and effectively forcing out first time buyers, no longer able to afford to buy, and pushing prices to unprecedented and unsustainable levels by 2006/7.

Even as early as 2005/6 alarm bells were starting to ring. Demand in the ‘buy to let’ market was fuelling the development of large numbers of one and two bedroom properties, not just in London but in cities throughout the UK. This created an over supply that in turn led to a fall in rental incomes. The rise in capital values forced yields below 3% to 4%, initially the primary reason for the birth of the ‘buy to let’ market, whilst at the same time bank base rates had rose to over 5%. With capital growth reaching double-digit levels annually, the thirst for ‘buy to lets’ continued, fuelled by imprudent lending (sometimes as high as 120% of the purchase price) and based on inflated potential rental income figures. This over supply of rental property was further compounded by many would be sellers choosing to rent out their homes rather than sell, often re-mortgaging their existing property and purchasing with higher levels of borrowing. As demand faltered, due partly to falling yields and also fears over sustained capital growth, property prices started to weaken and confidence began to evaporate, an ‘adjustment’ in the housing market became inevitable. This was further compounded by the untimely collapse in the banking sector and Stock markets, the resulting credit squeeze and more recently, the final nail in the coffin, fears of unemployment.

Yet today prices are down anywhere between 20% and 30% on those seen at the peak. With interest rates at an all time historical low it can be argued that this is possibly one of the best times to buy during the last 6- 8 years. However, even with prices reflecting levels last seen back in 2005/6, HPER levels are still above those needed for first time buyers to return to the market place. It has been suggested that property prices could fall yet further. As we have seen, the level of new buyers registering during the first quarter of 2009 is still way below those of three or four years ago and many recent sales have been to historic buyers looking for the past couple of years and who have bided their time as prices fell.

The real issue at present, is one of supply. With so many properties having been turned over to the rental sector there are genuinely fewer homes available to buy than was previously the case. Whilst it may be imprudent to suggest prices will start rising, particularly given such weak demand, there is a feeling that they may have hit rock bottom. With such a shortage in supply it is difficult to imagine prices falling a further 25% from today’s levels, as has been suggested. With prices roughly reflecting 04/05 levels there is a compelling argument that the differentials between selling and buying when trading up, can be lower today, than at anytime during the last 8 to10 years. This is particularly true given current lending rates. Perhaps what we are seeing are home buyers taking a long term view and slowly returning to the market to take advantage of opportunities that were beyond their budgets just a couple of years ago.

It will be interesting to look back in ten years from now and wonder if this was indeed the time to start buying again!

Contact Derek Fletcher at Edward D’arc on 020 8747 8333

May 26, 2009