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| What a difference a year makes. At this point last year, war was in the offing, the stockmarket in freefall and SARS was bringing business travel to a halt. With that sort of backdrop, property was hardly going to be flavour of the month, nor the main topic of dinner-party conversations, other than for the self satisfied über-bear, recently moved to rented accommodation, smugly predicting a crash of apocalyptic proportions and boasting about his hoard of gold bullion. At least he was right about gold. |
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| While we are hardly representative of the whole property market, our clients are a reasonably accurate barometer of sentiment - and that has changed dramatically. It is not what you would call a bull market, as some of the uncertainties of a year ago are still there, but the stock market is well off the bottom and a generally happier world climate is letting people get on with their lives rather than fearfully awaiting a millennial crash. We have never had such a good client list, both in London and the country, but our clients, like most economists, are somewhat disbelieving that there is no penalty to be paid in the future for the Keynesian pump-priming – particularly in the US – that has avoided the real pain that normally comes after a boom of the proportions of the late 1990s. The more optimistic think that the trick has been carried off in textbook form, the less sanguine believe that the Profit and Loss account has only been flattered by trashing the Balance Sheet. It is the classic wall of worry that markets climb.
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| On the negative side, there is no doubt that the dollar weakness is putting off some buyers – the internationally wealthy think in US dollars and a market that would be hard to call cheap, is becoming more expensive by the week through dollar lenses. However, this is hardly earth-shaking stuff in the context of a £/$ exchange rate that has been circling 1.60 for some years, which is why its effects have not been really felt – yet. The other effect of US policy that is rippling across the pond is the noticeable increase in the number of Middle-Eastern buyers - traditionally with a bias towards US real estate and other assets - who are feeling the effects of Homeland Security and shifting to the UK as an alternative. While the exchange rate may swing the other way, it is unlikely that US domestic sentiment will perform a similar U-turn.
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| What all these buyers say is that London is expensive. They are right but it is important to see this in a world context, a context that was nicely provided by The Economist in the chart below, illustrating the relative prices of two-bedroom flats in capital cities. Not many surprises here - and given London's time-zone, linguistic, financial and cultural status as arguably the pre-eminent world city, its relative expensiveness does not seem excessive. What is surprising is the column on the right illustrating the average nationwide house price, which shows UK house prices overall well behind many of its neighbours, and way below the Japanese and Dutch. However, if a line was drawn from the Severn to the Wash and the real estate below that line was measured in the same way, the balance between metropolitan and provincial would probably be more even. |
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| The implicit assumption by those who say that London is expensive is that there is a mean to which everything will ultimately regress. In other words, prices will fall and that if you wait long enough you will be able to buy cheaper – interest rates are rising and ordinary people are being priced out of the market; the arguments are rehearsed daily in the press.
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| For the domestic UK mainstream market, there is almost certainly a ceiling and there are signs that prices are bumping against in it in some areas. The international areas of both the London and country-house market, however, are not under the same constraints, as sentiment is affected less by interest rates (many buyers are paying cash) but more by activity in the City, overall business confidence, exchange rates, international uncertainty and tax regimes. On this basis, with the currency exception, the environment looks distinctly more benign than at any time in the last couple years, and if the market was going to tank, then it would probably have done so by now. Famous last words. |
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| The obverse question is whether the market will go up and, if so, by how much. Given the economic environment outlined above, this bit should be simple. Are there more buyers than sellers?
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| The sellers bit in the country is always constrained - the only reasons anyone normally sells in this market are the famous three D's - death, debt and divorce and there is no obvious rash of any of these nor any effective new remedies. Supply in London is surprisingly constant, rain or shine, boom or gloom and we know this because we monitor the number of properties, in all price ranges, in the prime areas, as they go onto our database which, on average, has about four thousand items currently on the market at any given time. What is surprising about this data is how little it is affected by sentiment in terms of short-term oscillation – there is very little difference comparing the same months year on year – though there is a reduction in overall numbers (roughly 10-15%) over the last three years, which would suggest that stamp-duty increases are having an effect on supply. If this shrinkage of supply pushes prices up it would be rather ironic, considering stamp duty was seen as one way of cooling the market. |
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| Statistically, we are rather suspect when it comes to demand, as we are such small-fry in the market as a whole. However, the fact that we are nearly 20% up in the number of clients in the country and over double in London, compared with this time last year, would suggest that the balance of buyers and sellers has shifted. With no corresponding increase in supply, market forces are pushing one way and that is borne out by our experiences so far this year, where competition for all the best properties is the order of the day – country and London. |
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| Of course, all this could be derailed at a stroke by what Harold Macmillan called 'Events, dear boy, events'. 9/11 came out of a clear blue sky, as did other disasters and, given the global nature of economies, and therefore property markets, these events can lock up activity for months. The sky is also not currently clear blue as economists argue the effects of debt and deficit worldwide, but it would seem that while the arguments rage, people are just getting on with their lives and accepting that uncertainty is a fact of life. The last word should, perhaps, be left to Macmillan's contemporary, Harry Truman, who once said, "Get me a damned one-armed economist". |
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