MoneyWeek's Roundtable: Where next for the property market?
Jul 24, 2009
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This month we invite the best experts we know to discuss the state of the British property market. Is the bear market over – or are signs of recovery just a blip?
John Stepek: It's about a year since our last property roundtable – where are we now?
Stuart Law: It seems to be a given that the residential property market is at the bottom or even coming out of it. One commentator has said: "I think we've missed the bottom now, haven't we?"
Ed Mead: He's probably in a comfortable job with a sizeable income. If you've got a good job and a decent-sized deposit, it's a fantastic market. Anybody else – forget it. No one's buying because they haven't got any finance. The banks say "we are open for business", but they are fibbing.
Stuart: There is vast amounts of cash out there.
Ed: That's two years of pent-up demand, but it'll dry up fairly shortly. These are people who have 40% deposits and good jobs, but there aren't that many of them.
Stuart: Oh, I don't know. I think the country is absolutely covered with them.
Henry Pryor: There are more people queuing for the 137 Clapham omnibus than have got good credit histories and can get a mortgage. Sure, more people are looking, but it costs nothing to go on Rightmove and search for a house.
Stuart: I'm drowning in sales. I've had to write cheques to reserve property off the market – finished stock, not off-plan – from banks and housebuilders. I haven't done that for two and a half years.
Ed: But at what percentage off the price that they would have sold at two years ago?
Stuart: 50% off. Silly prices.
James Ferguson: So when you told us at the 2007 property roundtable that house prices weren't going to fall, what you meant was they were going to halve.
Stuart: We have to be very clear here. You've got the retail house-price indices, which are down about 17% on average. Then you've got distressed prices, which are down far more. In December it was 40% off at auction. We were able to buy at about 50% off peak pricing. But that's not the normal housebuyers' market. And on retail prices, Nationwide's data, for example, are bouncing strongly. The whole last quarter is up 4.6%.
James: Do you know how many monthly rallies there were in the last housing sell-off? More than 20.
Ed: At D&G we've had five months of solid growth. There are twice as many buyers and half as many properties. But they are all the same type – if they're not foreigners, they're people with good jobs and 40% deposits. Everybody else is out of the game. So that has to run out of steam – I think in September/October.
Our panel predicts where house prices are heading
James Ferguson
Chief strategist, Pali International
• Down 30-40% from here, by 2017
Stuart Law
Chief executive and founder of Assetz
• Up 5-10% year-on-year, by the end of 2009
Ed Mead
Director, Douglas & Gordon Estate Agents
• Down 5-10% year-on-year, by end of 2009
Henry Pryor
Housing commentator and former estate agent
• Down 50% from summer 2007
Seema Shah
UK economist, Capital Economics
• Down a further 20% by end of 2011
Many people are now reading in the press that it's a good time to sell. Combine that with people now losing their jobs and there's going to be a lot more people selling. So I think prices are going to fall from this little blip. I think we're in a 1989-94 period – a very long period of not really doing anything much. How long that will last, I don't know.
James: Ed, you say we just bumbled along back then, but we bumbled along in an environment of quite high inflation. If you look at real house prices, they dropped 38% between 1989 and 1996.
John: Henry?
Henry: We're halfway down; we've more to go. I just bought a house in Chelsea for a client. It went on the market at £1.6m six months ago; we've just agreed terms at £1m. That's not unusual. And I've just been looking at the May Land Registry figures. In May 2007 there were 106,000 completions; in May 2008, 68,000; so far in May this year – 14,000. Let's say it doubles after all the data are in. That's 30,000; more than 50% down on last year. So the reason we can only go one way sales-wise is because we are on the bottom – you can't go negative.
Seema Shah: Activity has obviously bottomed. But mortgage approvals are still about 30% below the 1990s bottom. They need to double before they're at levels historically consistent with stable prices. Meanwhile, unemployment will continue to rise for quite a while.
Stuart: But unemployment isn't correlated to house prices.
James: I hate to say it, but he's right – you can't get a perfect match between house prices and unemployment. Lots of other things are involved. For house prices to go up, you've got to expand easy access to cheap credit – unemployment is pretty much irrelevant.
But if you've got limited supply because you've got no forced sellers, the quickest way to generate forced sellers is to boost unemployment. So while there's no set relationship between unemployment and house prices, it's not right to say that it won't matter when unemployment goes up sharply. It's bound to tip a lot of forced sellers on to the market.
John: Stuart, what do you think is happening in the market?
Stuart: I think June house-price figures could well be negative on a monthly basis. But July, August, September – game's over. We're into positive growth.
James: What makes you so confident?
Stuart: All the things that need to happen for a normal market to return are taking shape. We saw the mass off-market buyer enter the market in September, putting a floor under people who had to sell in volume – housebuilders primarily. As they have begun to sort their finances out – Taylor Wimpey sorted its covenant breaches out and the rest – they're raising prices slightly on distressed properties. We're now seeing a feeding frenzy, almost panic buying, from cash-rich, buy-to-let investors. We're selling in big numbers. Properties yielding 8-10% gross.
James: Where?
Stuart: All over – Manchester, Liverpool, Birmingham…
James: City-centre, two-bedroom flats?
Stuart: Houses around the outskirts, too. These are very easily lettable products. If you don't believe supply and demand was ever imbalanced you'll have a problem with this. But if you do believe there was an imbalance, all that's happened is that the imbalance has moved from those guys buying, to the guys now needing to rent. That's why rents and yields haven't really suffered much, except in London.
Henry: Rents in Cambridge are 20% down. Rents in Oxford are 18% down.
Stuart: According to surveys or real data?
Henry: According to letting agents.
Stuart: I wouldn't argue with a few percent, maybe. But is it relevant? Mortgage costs are so low.
James: You say that mortgage rates are low because base rates have gone down. But you probably haven't noticed that banks have been widening their spreads [the gap between mortgage interest rates and the cost of funding for banks].
Stuart: For new mortgages or existing? Because the guys who are buying in the market today don't care about mortgages.
James: They should. The whole market is dominated by people who buy using mortgages. If mortgage buyers aren't coming in behind these 'bargain' hunters, you'll have another down leg. The last house-price crash took six years, so we know that house-price drops take a long time. Yet you're piling in after 18 months.
Ed: I think this is slightly different, James. You've had a recession, the global credit crunch – all this stuff has driven prices down faster than anybody expected. If we've got six years of this ahead, we'll go to zero by this time next year! Last time it took three or four years to fall 25%.
James: Not in real terms. The fall was very fast early on and then it levelled off.
Stuart: Then went absolutely nowhere for ages. Ten years real terms, seven years absolute terms to get back to where it was. There is no chance of that this time.
James: I'm very concerned you're right. But in the wrong direction.
Henry: Roughly 450,000-500,000 houses will be sold this year, a staggeringly small number compared to the average 1-1.2 million. The Council of Mortgage Lenders reckons there'll be 65,000 repossessions. Roughly half a million people will die, resulting in 100,000 sales. Divorce will put another 106,000 homes on the market. So we have a huge proportion of forced sellers compared to normal.
Stuart: I recognise that risk.
Henry: And you've already told us that these forced sellers are going to be selling at 50% below the peak. So we're already down 50% from summer 2007. And look at affordability. The average wage in this country is £26,000 – how can you afford a house on that?
Stuart: The average UK worker is not your average buyer. The average first-time buyer's wage is £35,000 a year.
James: Actually, it's nearly £50,000.
Stuart: So where's the problem? The average UK house price on the Halifax/Nationwide indices is roughly £150,000. Let's say the first-time buyer is on £35,000 and the average first-time buyer's house is £120,000 – a bit lower than the average. Take off a 10% deposit and you have just over £100,000 for the mortgage. If the average wage of the first applicant is about £35,000, never mind £50,000 joint income, you've got your three-times multiple. So where is the problem?
James: You're completely misreading the first-time buyer data. A first-time buyer used to be someone who earned less than average and bought a cheaper house than average. Now they still buy a cheaper house than average but they earn way more than average. What does that say about affordability? It tells you it stinks.
Stuart: But it dovetails very well into the lower-sales-volume world we now live in.
James: No, it dovetails into a collapse in house prices.
Stuart: What dictates prices is supply and demand. For James to be correct we'd have to see a significant jump in supply – far greater than any increase in demand – or demand falling away.
James: Supply and demand of what? You are making the classic mistake of thinking that what matters for property prices is supply and demand of property. But what is my demand for property in terms of square metres? Unlimited. So what really matters is the supply and demand – or supply and price of – credit.
During the buy-to-let boom, there was a high level of credit supply, so we had a sudden surge in people who wanted to buy more than one house. So there was an artificial surge in demand for houses to buy – but those people immediately put those houses back on the market to rent.
So if you want to know what happened to actual demand for houses to live in, you look at rents. And real rents went down for five of the six years before this downturn started. So there was no shortage of housing per se.
Stuart: If there was oversupply, we'd expect to see rents collapse. They haven't. There's been a significant wobble in London because of the different dynamics but it's a small part of the whole country.
Henry: 20% is more than a wobble.
John: James, what needs to happen for the market to recover?
James: You need to resolve the banking crisis. Historically, that takes about four and a half to five years. But this one is bigger than average. Private-sector leverage ratios are higher than ever before and bank losses are probably only about a third of the way through in the US, less than halfway through here, and haven't even started in Europe.
Now property prices are all about the price of credit – and credit provision for the private sector for the next decade, across the Western world, is going to be constrained at best and negative at worst.
Last time house prices fell in real terms by 40% over a six-year period. This time I think we're looking at a decade-long contraction in property prices, which is only 18 months in.
Almost everything – house price/earnings ratios and so on – tells you that, even from now, let alone the peak, we are looking at as much as a 30-40% real drop in house prices.
Stuart: You're looking at your charts too much. We are on the front line of the market. Intelligent, sophisticated investors are saying this is a perfectly sensible place to buy. If prices fell further, they would buy more, but it's not really an issue.
John: So what's your forecast for the next 12 months, Stuart?
Stuart: Our forecast for this year was down 5%. To be honest, I think I'm wrong. It's looking very like it's going to be positive this year. Average of all the main indices – Rightmove, DCLG, Halifax, Nationwide, whatever – was 0.7% down on the year, by the end of May. That doesn't strike me as a crash. What happens in July, August, September is the key, but it's possible prices could be up between 5% and 10% by December.
John: What about you, Henry?
Henry: Stuart and James are both wrong. As far as I'm concerned, houses are worth 50% of the peak price. That's based on what we've heard from Stuart – the price the under-bidder will pay for something today; and on the fact that it's very hard to take your £26,000 average salary and turn it into something that allows you to buy a house.
I agree with the science of what James is saying, but I don't think it's going to take ten years. Say, for example, we get a general election which engenders a load of good feeling. Everybody will go out and think: "Oh, well, perhaps the glass is half full and not half empty." So I'm not as bearish as James, but I'm a long way away from where Stuart is.
Ed: I would take issue a little bit. You're saying it's worth what an under-bidder would pay for it. I can only tell you what we've seen. Prices across London are certainly higher now than at the start of the year. It may just be 4% or so, so if you're talking about where it will go year on year, I think you may see a 5-10% fall, which would be 25-30% off the peak. Where you go beyond that, I don't know.
John: Seema?
Seema: The majority of people who want to buy can't get credit. Even with house-price falls to date, first-time buyers are having to put down larger sums in absolute terms than ever. Unemployment is definitely going to rise further, so average earnings will be very weak. The government has said it will raise taxes in 2011, and there will be spending cuts. So you can't expect strong economic growth for a long time.
And even if buyers start producing the required deposits, income multiples are very unlikely to go back to five or six times salary. So this might be a nice little bounce, but it's going to go down further. Capital Economics' forecast is for prices to end this year 10% down on 2008, with a further 5% fall next year and another 5% drop in 2011. So I predict about another 20% fall between the end of 2008 and the end of 2011.
What's happening to house prices right now?
FT House Price Index
June: -0.3% m/m; -13.1% y-o-y
Biggest annual fall: -13.7% (April 2009)
Price at peak: £231,822 (February 2008)
Current average price: £197,802
Fall from peak: -14.7%
Based on: Land Registry figures for England and Wales
Nationwide
June: +0.9% m/m; -9.3% y-o-y
Biggest annual fall: -17.6% (Feb 2009)
Price at peak: £186,044 (Oct 2007)
Current average price: £156,442
Fall from peak: -15.9%
Based on: own mortgage offers
Halifax
June: -0.5% m/m; -15% y-o-y
Biggest annual fall: -17.7% (April 2009)
Price at peak: £199,612 (Aug 2007)
Current average price: £157,713
Fall from peak: -21%
Based on: own mortgage offers
Rightmove
July: +0.6% m/m; -3.1% y-o-y
Biggest annual fall: -9.1% (Feb 2009)
Price at peak: £241,642 (Oct '07)
Current average price: £227,864
Fall from peak: -5.7%
Based on: sellers' initial asking prices, based on Rightmove website data
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