Quarterly UK Market Review Q3 2011

Market Indices 

Monthly house price data reveals differing trends between Nationwide and Halifax, but both indices reported an identical fall of 0.1% for the third quarter. Land Registry data, which lags behind in its reporting period by one month, reports a year on year house price fall of 2.1%.

Economic Landscape 

The last quarter has seen a realisation of the true economic health of many countries. The fallout created by the downgrading of the US credit rating and ever intensifying Euro zone crisis is far from over. Investors have been selling equities and buying UK government bonds, gold and property in order to protect capital values. This is stimulating purchaser demand from investors in UK residential property who continue to see the market as a relatively safe haven; and in particular the Prime Central London market. However, there is no disputing that recent economic events are resulting in caution as buyers look to policymakers for comfort that there is not yet more bad news lurking around the corner.

The Bank of England has kept interest rates at 0.5% over the quarter and is now widely expected to follow the US in keeping interest rates at low levels until well into 2013. This will serve to allay the concerns of homeowners and encourage investors who can borrow at historically low interest rates and achieve a higher rate of return on alternative investments.

Perceptions and Reality 

Both buyers and sellers feel they now have the upper hand in terms of transaction power. Sellers feel with little competition in the market they can command the price they want in order to move. Buyers on the other hand automatically expect to achieve a discount off an asking price.

In reality both parties are right and wrong. Garrington are on a daily basis managing expectations in this respect. The lack of ‘best of breed’ homes is undeniably supporting values, and in order to secure such homes, buyers have to be decisive and collaborative with a seller in their negotiations. However, in other sectors of the market where scarcity is not an issue, Garrington are regularly achieving double digit reductions – but only when sellers are presented with compelling evidence of the real value of their home and accepting that value in any market is relative.

Changing Market Dynamics 

Recent research data from RICS and Nationwide reveals that the chronic shortage of homes in some parts of the UK is serving to drive prices up with London only now 2.9% below its 2007 peak. The table below illustrates the direct correlation between stock shortage by location and price recovery to 2007 values. In the best performing locations equity rich buyers remain a driving force in the market and Garrington forecast that this is set to become more of a long- term trend rather than a passing phenomenon.

Garrington have experienced a significant increase in enquires from investment led clients during the last quarter. The financial logic spurring on this growing client group looks sound, with significant research supporting not only short term rental growth, but changing home ownership patterns. Of particular note is a prediction from the National Housing Federation that home ownership levels will fall to 63.85% by 2021; a level not seen since the mid eighties. The net effect of this trend is forecasts of rent levels rising by 20% over the next 5 years.

Autumn Outlook 

As we enter the Autumn market we anticipate that a lack of quality homes in the best locations will remain a key feature. The London market shows no sign of losing momentum in the coming months, with our London team reporting that stock levels have been slipping in recent weeks, which will further exacerbate the competitive nature of this market.

In such conditions we expect off-market deals to become more prevalent in the coming months; a type of transaction that represented over half of the purchases we agreed for clients in the last quarter.

The latest round of Quantative Easing by the Bank of England, together with action to resolve the Euro zone crisis, will serve to underpin the economy and in turn the property market.

It seems clear that the economy is going through another transitional phase which naturally affects market sentiment and creates threats. However, for well informed and prepared purchasers this period may also offer attractive opportunities.