An unusual boost in the downturn

20 April 2010, Al Nisr Media – Property Monthly (Dubai)

By Camilla Dell

Looking back over 2009, despite the huge economic downturn, it was an unusually strong year for property prices. Prices rose substantially across the UK and recent Nationwide figures show the annual rate of growth has now risen to 8.6 per cent, up from 5.9 per cent in December — the highest rate of growth for two years.

In London, Knight Frank reported prices in the more expensive parts have actually risen 15 per cent since last March. They are now just 12 per cent below the market peaks. What has caused this growth to take place? There are a number of key drivers. There is the supply side—properties coming onto the market were extremely weak throughout 2009 with very few sellers willing to sell in a tricky market. Many sellers were under the impression they would be selling into a falling market and were concerned they would receive ridiculously low offers from the frenzy of investment buyers who were active at the time. At about the same time, demand started to pick up dramatically, particularly from foreign buyers looking to invest or own that once-in-a-lifetime pied-à-terre they had always dreamed of.

The currency-property correlation

A third factor has to do with the currency effect. Sterling’s weakness made London property even more attractive for dollar- and euro-based buyers, effectively giving them up to a 50 per cent discount off the price. This greatly contributed to demand. And a final factor came in the form of low interest rates, which in the UK are still at a record low of just 0.5 per cent. As a result, many owners who otherwise may have been forced to sell were able to hold onto their properties, contributing to the supply demand imbalance. What’s next for property prices? We have a general election just around the corner and many buyers and sellers are holding off until this has passed. The Conservatives have the city vote and are ahead in the polls, and as the party in power, they are more likely to cut spending rather than raise taxes any higher. However, many are concerned the outcome will be a hung Parliament, which would be the worst possible outcome. We think this scenario is unlikely.

But there is certainly uncertainty over how robust the economic recovery really is. There are concerns over rising taxes, cuts in public spending and, not least, interest rates. The timing of when interest rates go up will be crucial. At Black Brick, we see this is a huge influence on property values. It is therefore no surprise that there is a huge discrepancy between forecasters, with the most bearish predicating the market will fall five to ten per cent, and those bullishly inclined forecasting prices will rise ten per cent. Interestingly, some forecasters have revised their forecasts upwards. The Centre for Economics and Business Research recently put out forecasts that now predict home prices should go up by six per cent in 2010 and 20 per cent higher by the end of 2013.

At Black Brick, we don’t forecast, but we do have a view. We are encouraged by the fact we have already got 2010 off to a good start, signing in excess of £30 million (about Dh165.4 million) of new client mandates, mainly from foreign buyers. Our view is one of caution. With all that 2010 has to bring, it would be unwise to be bullish at this current time. We do see prices in prime central London, which is where we specialise, will continue to be supported throughout the year.

Market has touched bottom

This is primarily due to a shortage of stock and what appears to be a never-ending continuous demand among foreign buyers. We feel quietly confident that the bottom of the market in prime central London has been reached and the continued weakness in sterling makes property an attractive proposition. As long as investors are realistic about their timeframe, a minimum five to ten-year view, now is a good time to buy if you can find the right opportunity.

For owner-occupiers, we always advise that it’s much more about finding the right property and prices should always come second.

 

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