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| Out of the sub-prime debacle have come some wonderful similes. One fund manager mused that the sub-prime implosion was like a depth charge: first a few small fish float to the surface – the big whale comes later. Another compared it to an earthquake in California resulting in a tsunami in Japan. All very apocalyptic – but in the weeks after the Northern Rock bail-out it seems to be more Jim Callaghan than Corporal Fraser – with the prevailing sentiment being 'Crisis? What crisis?' rather than 'We're all doomed.'
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| Most estate agents are predicting business as usual with a bit of trimming of the year-end forecasts. The central thesis is that the prime market has 'decoupled' – in other words that what goes on in the tenements of Middlesbrough has nothing to do with the condominiums of Knightsbridge; also, that this is 1998 all over again: a financial crisis that didn't become an economic crisis, and that once everyone collects their frayed nerves, the boom will continue. |
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| Maybe. |
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| The LTCM crisis of 1998 is an interesting comparison. It blew up in August and during September and October we, at Property Vision, didn't do a single deal. In November, the world gave a collective sigh of relief – and we had our busiest two months ever and lived to fight another day. Buyers who held their nerve and bought in the lull got bargains. There seem, however, to be some major differences between then and the current situation, the first being size: LTCM involved only a handful of billions – whereas the worldwide size of this problem, derivatives and all, is massively larger. The second is solvability: in 1998 the Fed was able to bang a few heads together and achieve a solution. This one is buried so deep and so wide that no one knows how big it is – or where the whole problem, let alone the solution, actually lies. |
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| It is here that we are dubious about decoupling, because the resulting credit crunch means three things. First, goodbye to 130% mortgages to borrowers on nearly six times their salary. One would have thought so, but Abbey National chose the week after the Northern Rock crisis to announce, to a chorus of raspberries, their own 125% version which might just catch the last desperate buyer with a poor credit history before the market turns. The second is goodbye to the great new-century idea of lending long and borrowing short that Northern Rock thought was so innovative. Captain Mainwaring, in his bank manager capacity, might have had some words on this. Thirdly, and this is what will affect the market we operate in, it is goodbye to the cheap funding that has made possible the private equity boom that has contributed to keeping banks in fees and bankers in bonuses. It would appear that the credit landscape has now truly changed – and with it the main prop of the bottom end of the market and an important indirect support of the top. To say that nothing has changed seems ostrich-like. The question would seem to be not 'has it changed?' but 'how much?' and 'what sectors?'.
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| What sectors in our market? Investment banker territory – houses in Kensington, Chelsea and Notting Hill and medium-sized flats – particularly the price range of £1m to £5m (though as good one-bedroom flats now trade at £1m, this effectively means the lower end of the prime market). Docklands is always vulnerable to any slowdown in the City as there are fewer trustafarians or second-home buyers to take up the slack. If bonuses go down, there will simply be less money chasing those properties. The 'how much?' is a bit more difficult as the chronic lack of supply in the prime areas isn't going to go away in a hurry and sellers in this market tend not to be geared and can sweat it out. A fair point is also that if, instead of five buyers chasing the good items, there are now only two, it is not exactly a falling market. However, the direction of the market turns on whether it is one or two (or no) buyers – and that is a finer balance than it was; and where imperfections get disproportionately penalised.
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| Where it probably won't have much effect is in petrodollar country – the big flats in prime locations with all the bells and whistles that Russian and Middle Eastern buyers so love and of which London has so few. With oil prices pushing ever higher – and years until any meaningful supply of this sort of property comes on stream – it would be brave to fight the laws of supply and demand. However, there is always a temptation when the market has boomed as spectacularly for asking prices to overreach themselves. It is as well to remember that it was not very long ago – three years to be precise – that £1000 per square foot was considered a fantastic price. Confidence is a funny thing: even the richest buyer doesn't want to be seen to be the patsy that bought at the top, and when asking prices in the top developments are nudging £4000 per square foot, developers may find that there are limits to the decoupling between the prime and the so-called super-prime markets.
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| Our clients are more cautious overall than they were but at an individual level there is a noticeable difference between those making a discretionary move – a second home – and those who are moving because they have to – new baby, children moving schools or a new job. Inevitably the former are more picky and inclined to wait while the latter are as keen as ever if the right thing comes up. This is the same in London and the country, though the country's lack of supply means that buyers generally are less sentiment-driven. France is mirroring the London market with a booming super-prime market in, for instance, Cap Ferrat (which must now contain the most expensive residential real-estate in the world) and a much more pedestrian market in the hinterland behind the Côte d'Azur.
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| During October the PR message coming out of the City was suggesting that the credit crisis was easing and that business 'as usual' was returning – and this was reflected in the stock-market which touched previous highs. However, the inter-bank market remained stubbornly frozen which would suggest that banks didn't believe their own PR and that caution rather than adventure will be the watchword going forward. The second leg of the credit crunch currently unfolding is only going to emphasise that caution. If the great property boom of the last fifteen years was based on abundant and cheap credit, then it would appear that we have reached the inflection point. This will play out differently in all the micro-markets that make up the property market – but it is difficult to see 'business as usual over the last five years' as an alternative.
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