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Being a contrarian can be very profitable: when spring is in the air and ‘it’s different this time’, you sell; when everyone is queuing up on the window ledge, you buy; easy in theory but difficult to practise. Making it more difficult is that today there seems to be almost no consensus – other than that almost every asset class is ‘overpriced’ (whatever that means). Half the commentators see a rosy corporate outlook with nicely expanding economies; the other half see shades of the ‘Seventies’ around every corner in the form of a consumer debt mountain and sky-high oil prices.
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Working out where house prices are going, and what the effect of that will be, is particularly difficult as they have a unique position in the economy where they are both cause and effect. They are the cause of prosperity as rising prices free equity to be squandered in shopping malls and allow short-term credit card debt to be recycled into long-term mortgages. They are also the effect as confidence feeds on itself to push prices higher until … and here it gets difficult, because the debate has now moved on to what happens when the music stops and the momentum runs out. Does the soufflé gently deflate with rising inflation taking the borrowers’ strain, or does it reduce to a bruising recessionary cinder?
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If we are talking about the mainstream market, all signs are that the corner has been turned and that the boom is over. Whether you look at the latest figures from Countrywide, the biggest quoted estate agency, or chat to an estate agent who has temporarily hung up his salesman’s hat, the story is the same – of dramatically reduced turnover. Prices are more difficult to fathom, as this point in the market always has sellers who won’t ‘undersell’ their properties, leading to a long time-lag before reality and necessity meet in the form of a sale. As we have commented before, when building societies offer 130% mortgages, they are a symptom of a market running out of buyers – buyers, that is, who can push the market up. We are, as often before, only following America – the most popular mortgages in America now are ‘negative amortisation’ – where interest payments are reduced and added to the mortgage – so not only do you not pay back the principal but the mortgage actually grows. The FT recently commented that this is a market where there is ‘a near abolition of regulatory controls’. Watch this space.
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This is the backdrop for our market which is, unfortunately, causing a gulf between perception and reality as buyers and sellers of prime property read their newspapers and assume these stories apply to them. As we have said many times before, the market in which we operate is very different and driven by different factors: currencies, the City, 9/11 and non–domicile taxation are much more influential than interest rates. It is a cash market where chains are rare and the usual borrowing cash-flow pressures of the mainstream market are absent. Its boom, in London anyway, came to an end four years ago, since when, with some notable exceptions, prices have been broadly flat. The country market has been rising but this is because prices, relative to London, got left some distance behind by the turn of the century and have been catching up ever since. Despite prognostications of doom, gloom and worse, through a stock-market slump and a Gulf War, the market as a whole has held up well and remains the real-estate market of choice for cosmopolitan global buyers.
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The bomb attacks in July have given the market a real test but, if our new client take-ons are a good barometer of sentiment, then the effects, so far anyway, seem to be limited. The attacks, horrible and shocking though they were, hardly came out of a blue sky and, while our July new-client figures were down on a year ago, the months straddling July were both well up. No client of ours has put their search on hold because of the attacks – though there is no doubt that if bombs became regular rather than extraordinary, this would change.
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Indeed, it is a surprisingly strong market – though it doesn’t look or feel like a bull market as the price increases are focused on particular types of property. There are some common threads in what buyers are after in London – which feeds through to higher prices. This can be summarised as low and wide rather than tall and thin. London, unlike Paris for instance, is predominantly a city of houses rather than flats. This suited the British tastes for their own front door and garden but has less appeal to the modern international buyer who is used to concierge services and only climbs stairs in the gym. Unfortunately, large flats over 3,000 square feet are rare in London and that is where there is real demand – as there is for low-built houses: the per-square-foot premium for a Chelsea Square house, for instance, can be 50% more than its Eaton Terrace cousin. In the country (and in London), there is a noticeable raising of the quality bar with the exceptional (in all price ranges) attracting competitive bidding and the second-line languishing unsold – unless the price is right. For the very best around, valuation is a real challenge, as comparable evidence provides very little guidance when two billionaires like the same house and are prepared to slug it out.
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There are some interesting patterns of buyers – with a big upsurge in demand from the Middle East, where quintupling stock-markets and booming oil prices have large sums of money literally seeking a home. That home five years ago would have been Manhattan or Palm Beach but rich people don’t like being treated as putative bombers by Homeland Security and seemingly prefer Britain’s more laissez-faire attitude, making Mayfair and Belgravia the alternative markets of choice. There seem to be fewer Americans about – but more Eastern Europeans as well as Russians – and, almost surprisingly in this international market, a good block of home-grown British buyers.
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All these are more or less cash buyers who look on the UK as a place to live as well as an investment. It is pretty solid money, lightly geared – if at all – and somewhat isolated from most of the possible threats that are looming over the mainstream market. This is not complacent as there is plenty to be worried about in a dangerous world – but it is more likely to be Al-Qaeda rather than the Monetary Policy Committee of the Bank of England that will upset the applecart.
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