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| “Governor of Bank of England predicts housing crash” – this was one of the less apocalyptic headlines after the Governor’s recent speech to the CBI in Scotland, adding to an Albert Hall-sized journalistic chorus all singing from a depressingly similar hymn sheet. |
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| Unfortunately (if you want these prophecies to be fulfilled), the Governor predicted nothing. What he did say was, “There are, of course, many risks around the central view” – the central view being that the economy was doing fine with some inflationary risks. “Some of these come from the behaviour of house prices which have risen by over 20% in the past twelve months and more than doubled over the past five years. This sustained increase has repeatedly confounded expectations and taken the ratio of house prices to earnings to record levels. Demographic factors, a shortage of housing supply and low levels of inflation and interest rates, all mean that the sustainable ratio has probably risen somewhat over the past decade. Nevertheless, it is now at levels which are well above what most people would regard as sustainable in the longer term. There are some early signs, from surveys, of a slowdown in the housing market. After the hectic pace of price rises over the past year, it is clear that the chances of falls in house prices are greater than they were. So, anyone entering or moving within the housing market should consider carefully the possible future paths of both house prices and interest rates.” |
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| This is a bit like your doctor telling you that smoking will kill you – empirically proven – but not exactly a prediction of your demise within the next six months. |
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| However, there doesn't seem a lot to disagree with in what the Governor says as there must be some finite limit as to what people can borrow (and, more importantly, service) and therefore how much higher prices in the mainstream UK house market can go. That some sort of glass ceiling is being reached seems to be the case but the evidence is more anecdotal than statistical. Even if prices do fall (and the word ‘fall’ is not synonymous with ‘crash’), it is not necessarily a disaster even for the late entrants who have bought at the top – a loss, after all, is only a loss if you crystallize it and even if you do take it on the chin, your next house will be correspondingly cheaper. The vast majority of house-owners are living in properties that are worth considerably in excess of what they paid for them. In a falling market they may feel they are losing money – whatever is the opposite of the feel-good factor – and this may rein-in consumer spending but, unless there is some significant catalyst (such as significant unemployment or an interest-rate spike), to paraphrase T.S. Eliot, it is more likely to end with a whimper than a bang. |
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| Multiples of earnings are less of a limiting factor in our particular market. To illustrate this point, we recently saw a potential client from South America who was looking for a pied-à-terre in London. At the end of a lengthy discussion on prices, he was not remotely fussed that we had been talking in dollars and he in pounds sterling – the point being that it didn’t matter to him; interest rate levels are unlikely to affect his thinking. |
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| It also illustrates, once again, the truly international nature of the Central London market – and the country market that surrounds it – where international events, offshore taxation and currencies are the drivers of sentiment. A client recently commented that London is now rather like Venice in the sixteenth century, a tolerant commercial centre where anyone who wants to operate a global business can base themselves. It is a market that has, in many ways, decoupled itself from even its close neighbours – Kennington has more in common with Kenilworth than Kensington. |
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| Which brings us onto the Central London “bubble” which is a curious phenomenon in that it has been singled out as the prime example of where prices have truly exploded; interesting, as the reality is that they have hardly moved over the last three years – prices have been up and down as a barometer of sentiment, but overall, flat. This doesn’t mean that prices aren’t too high – whatever that means – but common sense (an oxymoron according to some) would suggest that, if there was a cliff, it looked rather more crumbly in early 2003 than it does now, and that if the market was going to go over, it would have done so by now. This seems to be the view of most buyers this year. |
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| This is not a Panglossian view of the world as there are areas where buyers and tenants are in short supply – particularly for the smaller flats so beloved by the buy-to-let investor. If the theory is true about the investor pricing out the first-time buyer, then it will not be a pretty sight when a lack of tenants forces the investor to sell – to whom? |
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| Again, segmentation is everything – there is a real shortage of bigger flats to rent and buy, and rents and prices here are moving ahead of the herd. Country-house prices – particularly for the top quality – have been powering ahead this year fuelled not only by the usual shortages but also by an “arbitrage” between London and country prices – London prices have moved ahead of the country over the last ten years meaning that the London seller of a relatively modest house is able to buy a substantially grander house in the country than the same seller in the early ‘80s. This had been a general observation but, to see if there was real substance behind it, we looked at individual houses where we knew the selling history over the past twenty years and the differential would seem to be around 25% at the moment. This suggests three things: London is expensive, the country is cheap, London’s nature has changed – or all three. |
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| So where to from here? The immediate market, if previous experience is anything to go by, is likely to be quieter in the second half, though the new client enquiries we are seeing now would suggest that it will only be margin-ally so – particularly in the country. Last year was something of an aberration in that a gloomy spring was followed by a busy autumn as the world breathed a collective sigh of relief. The normal annual pattern – particularly in London – is for demand to increase with the amount of daylight. This attracts opportunistic sellers who hit the market just as many of those buyers have already bought, which leads to the shaking of wise heads and sucking of experienced teeth in the autumn. This is not a crash, nor even a slow-down, but an almost standard annual cycle that will, no doubt, play out against the background music of a journalistic choir-practice for a requiem. |
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