House prices — sellers forced to offer discounts
05-25-2017
High-end vendors forced to be flexible as election and Brexit take toll on values
UK house prices in decline
by: James Pickford
It was the archetypal country pile, a perfect weekend retreat for the hedge fund manager or City grandee. The seven-bedroom trophy home, nestling on the western edge of the Home Counties but within striking distance of London, came complete with tennis court, swimming pool and “party barn”. So when its owners recently decided to sell, they confidently expected to get around £3.5m based on local sales they had seen over the past two years. The three estate agents they asked to come up with separate valuations had other ideas, however. Lopping 25 per cent off their hoped-for estimate, they came back with figures close to £2.6m, a drop of nearly £1m. The vendors — clients of buying agent Henry Pryor — are among many to have been wrongfooted by recent changes in the UK property market. “Like everybody, they had a view as to what their home was worth. And 18 months ago it probably was worth £3.5m. But today, it definitively is not,” Mr Pryor says. Selling houses is a tough business these days. As house price growth has slowed, and the market is buffeted by political and economic uncertainty, transaction levels have fallen and buyers have increasingly gone into retreat. Vendors with an overambitious idea of their home’s value are facing a reality check when they hit the market — while the dwindling numbers of those prepared to make an offer are becoming more determined than ever to haggle on price.Slowing house price risesAssumptions of inexorable house price growth were shaken this month after the Halifax house price index posted its first quarterly fall since November 2012, with average sales prices 0.2 per cent lower in the February to April period than in November to January. The slowdown was reinforced by forward-looking data from the Royal Institution of Chartered Surveyors, which reported declining sales and new instructions and interest stagnating among buyers.Martin Ellis, Halifax housing economist, says the rapid house price growth seen between 2014 and 2016 hit affordability and curbed demand. “Signs of a decline in the pace of job creation, and the beginnings of a squeeze on households’ finances as a result of increasing inflation, may also be constraining the demand for homes.”
If conditions are worsening, there remains a gulf between sellers’ persistent hopes for a market-beating price and buyers’ hardening expectations of a discount. “We’ve been through an extraordinary period. Demand is way down. Everybody’s having to be more realistic in terms of having to sell their property. It’s the disparity between ambition and value,” says Roarie Scarisbrick of Property Vision, a buying agent focused on London. Many homeowners who might have put their house on the market to take advantage of rising prices are now drawing in their horns, leading to a drop in the number of available houses on the market. Agents are battling to land new stock as many homes already on their books will now be priced too high to attract today’s buyer. “Agents need the repricing because they want some volume to sell. That’s coming through in prices stagnating,” says Richard Donnell, research director at housing market analyst Hometrack. He believes the market is going through a “mini-cycle” where agents are fighting to close the gap in expectations between buyer and seller.
“At these turning points it takes 12-18 months for things to clear.”The hit to top-end homesEvidence suggests it is the owners of higher-priced homes who are bearing the brunt of the recalibration, as sellers of expensive properties are making a bigger adjustment in their expectations than those of average-priced homes. Rightmove, the property website, says the average gap between asking and selling prices for £2m-plus homes in the first three months of 2017 was 8 per cent, compared with 3.2 per cent for all properties. In the same period in 2014, owners of the more expensive properties dropped prices by only 4.4 per cent. “The higher you go up the value scale, the bigger the adjustment has been. This part of the market is more volatile because it gets thinner the higher you go,” says Lucian Cook, director of residential research at Savills, adding that their exposure was worsened by big changes to stamp duty that arrived in late 2014, landing high-end home buyers with bigger tax bills. The figures on homes for sale versus completions show the scale of the task facing high-end sellers. A search on Rightmove this month showed 13,600 £1m-plus properties on the market in London and 26,900 across England and Wales. Yet according to initial data from Land Registry for March — the latest month published — there were just 305 sales completed of £1m-plus property in the month in London; and a further 205 in the rest of England and Wales.
Mr Scarisbrick of Property Vision says sellers at higher price levels can take some comfort in the effects of the drop in transactions. He estimates that the number of £5m-plus properties changing hands is down by about 65 per cent compared to 2014 but says this has nonetheless been matched by a drop in supply as sellers decide against putting homes on the market. That has cushioned prices to a large degree, he says. He makes the point that the initial guide price is often so far removed from the eventual asking price that it makes little sense to use it as a benchmark — and doing so will lead to exaggerated results. “The average transaction went through at 6 per cent under the asking price at the point of sale.
Where it started [in the guide price] is kind of irrelevant.”Since the market mood has turned, it is clear there have been fewer buyers with purely speculative motives — those eyeing a bet on fast-rising property values. The introduction of new stamp duty rates in December 2014 and a surcharge on second homes in April 2016 has also substantially increased transaction costs. Take that £2.6m property in the Home Counties, where the sellers had to drop the price by nearly £1m. Before the new stamp duty rules came in, a sale at this price would have attracted a £182,000 bill. Under the current rules, where the price band above £1.5m attracts stamp duty of 12 per cent, that bill rises to £225,750. If the property is a second home (in addition to a London home, say) that 12 per cent rate rises to 15 per cent, inflating the bill to £303,750. These increases will weigh against the price buyers are prepared to pay. And if there is no imperative to move, they may well stay put. “By the time they committed to spending all this money and absorbing the transaction costs they’ve got to have a pretty good reason to move — usually divorce, or the need to trade up or down,” says Mr Scarisbrick. What’s a seller to do? Mr Pryor warns that buyers have become more ready to challenge on price, citing everything from slowing house price growth to political uncertainty over the general election and Brexit. Rising transaction costs are another reason people are giving pause before embarking on a purchase. “If you’re thinking about lashing out a serious amount of money the bulk of which is earned out of taxed income, you want to make sure it goes as far as possible,” Mr Pryor says. “Moving house today is like passing a kidney stone — you really don’t want to do it too often.” Given the anxious state of the market, the question for vendors and their agents is how they should decide on the right price to maximise interest.
Do they choose a high price in the knowledge that they will in any case be asked for a heavy discount as power shifts to buyers? Or do they recognise a long-term change in the climate and take a hit on the guide price to attract more interest? The latter carries dangers, if most buyers believe that sellers are largely offering unrealistic opening prices and demand discounts as a matter of course. But to price high risks putting off potential buyers. Mr Cook says sellers may have to take a “leap of faith” that making a meaningful reduction in their price expectations will lead to more interest among buyers. “How much do I have to cut to make sure I generate renewed activity which gives me some competitive bidding? That’s the difficult judgment call that a lot of people will have to make.”Estate agents are making it clear to prospective clients that they are entering a newly price-sensitive market. Colin Sharp, an agent in Strutt & Parker’s Guildford office, says many buyers in the prime markets “want their pound of flesh”, citing an attractive family house near the centre of Guildford, which went on the market in January at £1.75m, but had attracted offers between £1.5m and £1.6m.
“Buyers do think they are holding sway at the moment. They know the value of the pound in their pocket and they’re expecting to take certain percentages off the price of a property.”One way for sellers to get a more accurate sense of their market prospects is to give their estate agent a grilling. Ed Mead, an independent property expert and founder of Viewber, an online property viewing service, says people often failed to do so because of a misguided British sense that it was somehow inappropriate to ask probing questions. But sellers needed to be more “savvy”, he says. “What you want to say to your agent is: ‘Can you tell me exactly what you’ve sold in my price range in the past six months and what the discount to asking price was?’ Then you’ll get some idea of what the truth is.” It is not hard to spot when a property has been marketed at too high a price: it will fail to attract any viewings. Dropping the price should generate more interest. But if a repriced property is seen by 20 potential buyers and fails to elicit an offer, the vendor may need to think about going further. Mr Mead says too many people are needlessly terrified of doing this. “If you lop a lot off the price and it’s then too cheap, that will be evidenced by the fact you’ll get lots of buyers who all make an offer. In which case you’ve got a great situation — you just go to best bids.”Tactics that temptOnce a vendor has made the decision to cut the price, though, they should do so by a substantial amount, rather than minor increments of £5,000.
Many buyers now look for property on agents’ websites and online portals, typically searching within a specified price band. In order to reach buyers with fresh eyes, a price-cutting vendor should find a new level just below the upper threshold of the next lowest price range, say, £249,500 when cutting from £270,000. Tactically it may be better to sell up and rent before you buy rather than selling and buying in one go, even if this raises your transaction costs and the “hassle factor” of moving twice. If selling has got harder, it makes sense to resolve that part of the process first, advisers say, so as not to be at the mercy of a difficult buyer — or a long buying chain — when you have identified your next destination. It will also put you in a stronger position to make a decision and move quickly at a time when little fresh housing stock is coming on to the market. “Remember that as a seller you no longer have the upper hand; the buyer will tell you when he’s going to give you the money.
The balance of power has shifted,” says buying agent Mr Pryor. “But once you’ve got your pile of money, you can go out and put it on the table. When you’re sitting on the other side, your bargaining power is far superior to what it was 18 months ago.” In short, if vendors suffer in a cut-throat market, they can make up for it by cutting a hard bargain when they buy. A property marketplace in transition creates opportunities for the canny operator, says Mr Cook — as long as they can overcome any sentimental attachment to prices of yore. “Sellers may understand what’s going on in the market but for whatever reason they don’t necessarily think it applies to their property — because it’s something they know and love.” London vs the restThe pressures on asking prices are anything but uniform across the country. But data published this month by estate agency network Countrywide suggest London has suffered more from the change in market mood. For nearly all of the past decade, more houses in the capital sold above the asking price than in the rest of the country (as a proportion of the total).
Since August 2016 the situation has gone into reverse, with London homes taking the bigger hit on asking price. Countrywide says this reflects the increasing number of homes on the market in London compared with elsewhere. Large numbers of new apartments are completing in the capital, meaning stock levels have risen for 10 consecutive months, and the time it takes to sell a home has steadily lengthened.But the London average conceals a good deal of variety. Figures from Hometrack show “hot” markets in outer boroughs are dropping their asking prices less than those in areas of inner London. The average reduction in asking price in Bexley is now 4.9 per cent versus 7.2 per cent in Westminster, Hometrack found. “Barking and Bexley have been very strong housing markets in London over the past two years,” says Richard Donnell, Hometrack research director.
“The higher percentage of asking price achieved only happens in very strong market conditions. Westminster and Wandsworth are typical of inner London boroughs where house price growth has been slowing since 2015 and the slowdown has accelerated recently.”In the market for expensive central London properties, a psychological herd instinct also appears to be at work. Homes in the region of £10m are sitting unsold on the market for as long as a year until one buyer makes a bid, Mr Scarisbrick says. Then other buyers quickly pile in, creating a last-minute bidding war that benefits a vendor who may have been on the point of giving up hope. “People rely to a certain extent on the reassurance of knowing someone else is interested,” he says. “They sit on the fence until they feel confident. It’s one way of buying a property but it’s not ideal.”
Copyright
The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.