1st October 2008

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October 2008

From Meltdown Monday to Black Friday, the past few weeks have witnessed some of the worst turbulence to hit the financial world since the Wall Street crash of 1929. With the entire global banking system teetering on a precipice and governments scrambling to rescue failing institutions with billion pound bail-outs, credit markets remained gridlocked, unable to offer respite to the beleaguered mortgage market.

The extent to which the credit freeze has impacted UK property sales has been underlined by the industry’s leading data providers. The UK’s largest mortgage lender, Halifax, confirmed that completed property sales last month were down 47% on the previous month last year, while the Royal Institute of Chartered Surveyors (RICS) announced that sales were down more than 50% from a year ago – their lowest level since the RICS survey began in 1978. Meanwhile, the Nationwide Building Society reported a 1.7% fall in house prices in September, the eleventh consecutive monthly fall in the benchmark index.

Tellingly, however, all three institutions struck a more optimistic note for longer term prospects. Halifax noted that the 1.3% decline in its house price index in September was the smallest monthly fall this year, indicating that the trend rate of decline may be beginning to stabilise. Nationwide’s chief economist Fionnuala Earley also pointed to a stabilisation in the pace of house price falls, commenting that the “astonishing and unpredictable developments in the housing and financial markets” should not detract from sound longer term fundamentals. “There is no reason to expect that over the longer term house prices should not continue to go up in real terms, even if we are going through a sharp correction now.” Meanwhile, RICS spokesman Jeremy Leaf highlighted the potentially beneficial impact of the measures taking by government to ease the financial crisis. “The announcement that the re-capitalisation of banks will be accompanied by increased lending to home owners, raises the possibility that the lack of mortgage finance that has so damaged the housing market might be eased” he stated. Leaf draws particular attention to the increasing gap in purchasing power between those reliant on access to mortgage finance and buyers who can enter the market without it, commenting: “As it stands, only those with significant finances are in a position to access the market”.

Against this background, the prime central London property market, long a magnet for the wealthy, remains an intriguingly separate entity to the rest of the UK. Whilst London’s ‘super-prime’ market (encompassing properties over £10m) has continued to exceed all expectations for price growth, properties in the middle tier of the prime sector have experienced sharp falls. Savills, the estate agent, this week revealed that prices for prime London homes are 12.1 per cent lower than a year ago, after falling 3.7 per cent in the third quarter. Location, of course, is key, and the capital remains a highly diverse market with price ranges varying enormously depending upon postcode and the quality of the property. Savills confirms that property values have been worst affected in destinations of choice for City executives, many of them in South West London. In Barnes, Fulham, Wandsworth and Clapham, prices are down 16.5 per cent in a year, while Kensington homes are worth 16.1 per cent less than a year ago. Research from estate agent Cluttons provides further evidence that homes south of the river have fallen most sharply, reporting a 10% annual drop in the value of homes South West of the Thames, compared with a more resilient 3.5% drop for homes in the South West Central London area. Mayfair, for example, which contains ‘trophy’ homes across various price bands, continues to outperform other neighbourhoods within the prime central London area, according to Liam Bailey, Head of Residential Research at property group Knight Frank.

In the current uncertain market conditions, it is clear that cash is king. Buyers with less dependence upon mortgage financing and whose fortunes have a greater degree of independence from the UK economy and financial sector, are increasingly viewing the slump as a rare investment opportunity. Camilla Dell, Managing Director of Black Brick Property Solutions comments: “We are seeing firsthand the enormous appetite for prime London residential property from clients in the Middle East and Africa. Many are acutely aware of the strong long term fundamentals for the London market, particularly for those properties in the best locations, so this downturn offers them a great opportunity to enter the market. Interestingly, we are also experiencing strong levels of interest from high net worth individuals who now believe real assets such as real estate offers a safer haven for their wealth than stocks, shares or even banks. London property is high on their priority list.” Liam Bailey, Head of Residential Research at property group Knight Frank also says that he is seeing a growth in interest from investors who feel that bricks and mortar are safer than banks and stocks and shares in the current economic climate. And with cash to spend, they are finding vendors prepared to offer significant discounts on the price.

In the midst of severe market volatility, many industry commentators have remained steadfastly focused on the compelling long term prospects for the UK housing market, citing an increasingly restricted supply chain as a key reason to look ahead with greater optimism. The credit crunch has had a particularly dramatic effect on the housebuilding sector, where activity has declined sharply on the back of falling prices and restricted financing. Pointing to the widespreadfreeze in development for private sector builders, Economics group Capital Economics suggest that much – if not all – of the recent progress in boosting new housing supply will be reversed over the next year or two. Indeed, the Royal Institute for Chartered Surveyors estimates that only 66,220 new homes have been built so far this year, most of them before the credit crunched intensified in the Spring. The organisation believes that less than 100,000 homes will be built next year; less than half the number required to meet the government’s target of building two million new homes by 2016 and three million new homes by 2020. This will inevitably have implications for the UK’s long term level of supply and provides a key support to property investors prepared to take a longer term view.

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