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Safe as houses? Not in this fast, volatile market


The property market isn't a safe haven but highly complex market 
The property market isn't a safe haven but highly complex market

In the 1970s, homeowners stomached 15pc mortgage rates, while Black Wednesday, the British withdrawal of the European Exchange Rate Mechanism (ERM) and four years of house price falls marked the bust of the 1990s. These were all decade-defining crises which severely affected the buying, selling and construction of homes.

However, the events of the last 10 years: the global financial downturn; record house price rises; unprecedented levels of foreign investment; layers of government intervention and friction taxes; and political turbulence have conspired to create the most “complex” property market in modern history.

The roller-coaster ride

“The global economic downturn of 2008 was one in a century, and completely changed the landscape,” says Alex Michelin, founder of developer Finchatton. “We’ve been on quite a ride in the property market ever since.” The annual rate of transactions dropped from 1.61m in 2007 to 900,000 in 2008, then gradually climbed to 1.2m last year. Early predictions for 2016 sit around the 1.12m mark.

World War Two delivered a blow to the housing market, as more than 1m homes were damaged or destroyed
World War Two delivered a blow to the housing market, as more than 1m homes were damaged or destroyed

The average UK house price fell 15.5pc in the year to February 2009 but this was followed by a surge in the annual growth rate to 9.1pc in April 2010, driven by equity-rich buyers in the South East and cash-laden investors hoovering up bargains. Market momentum then fell away due to the scarcity of finance, and national house-price growth remained in negative territory for 15 months from January 2011.

The second post-recession peak came in October 2014 when growth reached 9.4pc. Since then, figures from the Office of National Statistics (ONS) show the pace has eased to 8.3pc in July, taking the average price to £217,000.

Polarisation of prices

During the decade between 2006 and 2016, the property market became badly polarised. Data from Savills reveals the widest ever North-South price divide.

Values rocketed by 105pc in inner London over that time, in stark contrast with the North East, where prices fell 4pc.

“Never before have we seen a 10- year period in the UK housing market with so many twists and turns or as much polarisation. It leaves us with an incredibly complex market,” says Lucian Cook, head of residential research for Savills.

London typically leads a housing market recovery. Prices fell by 16.6pc in the capital in the year to April 2009 but over the next 12 months shot up 14.9pc. Although the growth rate slowed considerably in 2011, it recovered with renewed ferocity and hit its second post-credit crunch peak of 20.6pc in August 2014 – more than twice that of the UK average.

This double bounce was a reaction to the depth of the price crash in areas such as Knightsbridge, where values fell from £3,000 to £1,000 per square foot, according to Michelin.

Parents and grandparents are increasingly helping children get on the property ladder
Parents and grandparents are increasingly helping children get on the property ladder

“The crash was an overreaction, and in my view property fell below the level of fair value.”

Although the capital has long attracted foreign wealth, Nigel Hugill, co-founder of the developer Urban & Civic, claims the level of overseas purchasing and construction capital deployed after the crash was unprecedented.

Already a leading global city, the safe haven status of the London market was elevated by a loss of faith in the stock market and pensions following the financial meltdown, together with historically low interest rates (0.5pc set in 2009) made borrowing to buy property tantalisingly cheap.

The cash buyer also became a major player in the UK at this time, now representing 33pc of all purchasers, up from 25pc in in the early 1990s. Such sales negate the need for lender surveys and skew pricing.

The bank of mum and dad (and grandma)

The polarisation of the housing market has not just been geographical, there is now a gaping chasm between the generations. Research from the Council of Mortgage Lenders shows that 64pc of householders born in either 1960 or 1970 owned their own home by the age of 35.

For those born in 1980, this figure falls to 44pc, and it’s predicted that only 39pc of those born in 1990 will own their own home by the time they reach 35.

“The resulting affordability issue for first-time buyers and second-steppers is likely to be a long-term feature of the housing market,” says Cook.

Another complicating feature of this cycle is “the bank of mum, dad, grandma and grandad”.

The pension fund L&G has reported that £5bn is passed down from parents to help get their children on the ladder every year. This in turn creates a divide between those who have access to family wealth and those who don’t.

“Prices are just a proxy for the polarisation of a whole range of inequalities,” says Adam Challis, head of residential research at the firm JLL.

Fortunes reversed

During the second half of the property cycle, there has been a reversal of fortune in London, as sales activity in the overheated central zones slow and the rest of the UK speeds up.

Statistics from Savills reveal that over the 12 months to June 2016, central London prices rose 8.6pc, compared with 15.6pc in the outer rim of the capital, 14.3pc and in the East and 12.3pc in the South East. This switch is not unusual but the fragmentation of Greater London into many distinct markets has been so extreme in this era that it has rendered any capital-wide average house price data worthless.

Property prices in the central boroughs, improving transport infrastructure and the gentrification of areas such as Stratford are funnelling young professionals into new parts of the city.

This month’s ONS figures showed that values in Kensington and Chelsea fell 3pc year-on-year, whereas big increases of 20.8pc were recorded in Newham.

Complicating the cycle

Problems in the central London and country markets have been greatly intensified by the previous Chancellor’s obsession with friction taxes. George Osborne hiked transaction tax on sales worth more than £937,000 in December 2014.

“It felt like the market [above £1m] stopped and shuddered that day,” Michelin recalls. In combination with pre-election and post-referendum uncertainty, the city and country markets above £1m are facing “strong headwinds”, he adds, with predicted discounts of up to 30pc in Mayfair.

“Stamp duty is a major complication in this market,” says Hugill. “It was an Osborne landmine which has substantially slowed liquidity in central London.”

Former chancellor George Osborne, who introduced the Help to Buy loan schemes
Former chancellor George Osborne, who introduced the Help to Buy loan schemes

The mainstream market is not shielded from disruption at the top.

“People think there is no ripple effect but if there is less activity in the upper echelons, there are fewer homes to move up into,” says buying agent, Henry Pryor. “Also, those forced to sell at a significant discount have smaller amounts to pass on to their children, and eventually the bank of mum and dad could go bust.”

Mr Osborne also tinkered with the bottom of the property ladder, introducing the Help to Buy equity loan and loan guarantee scheme in April and October 2013 respectively. The programme has been criticised for stretching the loan-to-value ratio for young buyers purchasing a new-build home and artificially inflating prices – the value of new-builds has jumped 15.6pc in 12 months, according to the ONS, compared with 7.8pc for resold property. While pushing up values, the former chancellor was also presiding over a chronic housing supply crisis and sluggish build rate.

Complexity for consumers

In fact, the government ended up sending out mixed messages. Help to Buy clashed with the Bank of England’s Mortgage Market Review, introduced in April 2014, which forced banks to future-stress-test a customer’s ability to meet repayments. While it was suddenly harder to get credit, the accessibility of data fuelled the nation’s obsession with property prices.

 “The complexity of data, access to it and social media has caused information overload. There are six or seven different house price indices pumping out stats that all tell a different story. It’s very hard to find transparency,” says Challis. “The abundance of data has changed our perception of housing. What was once seen as a place to live and raise a family is now viewed as a commodity. That’s not healthy.”

Property owners have also developed a hyper-sensitivity to the socio-political climate. It’s a dangerous mindset in a market powered by shifts in sentiment rather than economic reality. Article 50 has not been activated to exit the European Union and yet housing chains started to collapse in the aftermath of the vote.

The autumn selling season

In such a complex market, experts disagree about what will happen next. Pryor believes London values will fall and within 12 to 18 months the rest of the UK will follow. JLL’s Challis expects a continuation of house price rises above inflation in the mainstream market, although this rests on employment resilience in the regions, and political certainty after Brexit.

So what can we be sure of? There is industry consensus that Britain is entering a tough season in which agents will have to work harder to make a sale and the process from offer to completion will take longer.

This environment will breed more unusual behaviour, such as the buyer at the top of the chain purchasing the property at the bottom to hold the deal together – a phenomenon that was on the rise this summer, according to Savills. More properties are being sold in secret as vendors test demand.

But there’s another twist. Despite the central London slowdown, the fall in sterling could chivvy overseas buyers.

“We could see a softer version of the bounceback after 2009 and the beginning of the next upward trajectory,” Challis concludes.

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