Market Comment

The Great Divide

The continued ‘demise’ of the housing market has been widely reported in recent days following the publication of even more weak data. While the much publicised monthly statistics from the Nationwide show an extreme slowdown in May, it is always preferable to look at changes in the 3 month data in order to smooth out irregularities. The chart below summarises this. The Nationwide numbers show a fall of 2.9% in the last 3 months compared to the previous 3 months, taking average values back to levels seen in early 2007.

An imbalance between supply and demand is one of the reasons the market has weakened; figures from Hometrack show that there was a 6.7% drop in new buyers during May whilst the number of properties for sale has increased by 20% since February. There were only 58,000 mortgage approvals during April which is roughly half the level seen a year earlier.

Increasing uncertainty continues to weaken confidence and this month we have seen a virtual stand off between buyers and sellers. Buyers have been holding out for further price falls, while sellers have been refusing to budge. Everyone seems to know it’s been raining – but just not on them. The net result is a 34% fall in the number of transactions and this is widely predicted to worsen through the summer. Whilst there are currently very few examples of negative equity or forced selling, a complete collapse in transaction levels could lead to a serious impact on the wider economy.

Economically, we are entering a new phase. In recent years, average prices have shot up during a period of low general inflation and consequently we have benefited more than we have even been able to identify. “Real” inflation-adjusted house prices were rising more sharply than we could actually appreciate. Now, the opposite is true; we have declining prices in an environment of rising inflation, which consequently means “real” mainstream house prices are falling more sharply than cash prices. The bitter pill for the housing market is that the new inflationary environment may well prevent the MPC from cutting interest rates any time soon.

Notwithstanding this, some people still wish to move or need to sell, which means as far as the national mainstream market is concerned, as the numbers of unsold properties climbs, prices are likely to come down further. I therefore expect things to get worse over the next few months before, assuming the mortgage market has eased, conditions start to improve. Through the Summer the expected pockets of resilience will be for genuine quality family homes and for anything within the super-prime bracket.

Consequently the very top end of the market remains the preferred sector to be involved in and the super-prime market is outperforming the mainstream right across the country. The Savills chart below even records a positive quarterly growth figure for £5Mil + which is a result of this 'wall of wealth' chasing a finite amount of property. For the time being it seems the more you spend the safer you are.

This is not just in London, Garrington was involved in a bidding situation earlier this month on a rare and special house in Devon with a guide price of £5Mil – there were 6 other British bidders (no foreign money) and the eventual deal was struck in excess of £7Mil. The best sells. The rest sticks.

It goes without saying that a downturn in any market presents opportunities. The property market is no exception. Wherever I’ve been recently I seem to have met wealthy investors looking at setting up vulture funds; there is certainly no shortage of capital arising from 15 years of economic prosperity.

Whilst there is no doubting the current market is more challenging, Garrington clients will benefit more than ever from our independence, expert advice and ability to identify opportunities. Due to the reductions a professional negotiator achieves, they are also increasingly likely to find the service becomes self funding.

PHIL SPENCER
Chief Executive
4th June 2008

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