October 2010

Different markets? Different worlds. The latest figures and commentary on residential property within the UK really only serve to highlight the chasm between conditions in the increasingly moribund mainstream market outside of London and the continuing attractions of property in and around the capital’s so-called ‘golden postcodes’. Hard evidence of the polarisation in market conditions has been readily accessible. The widely-watched Halifax House Price posted its biggest ever monthly drop in September. Meanwhile at Black Brick we have recently participated in (and won) two ‘sealed bid’ auctions on behalf of clients in prime central London.

As we have highlighted before, the prospect of widespread public sector job losses and wage cuts in combination with rising taxes represent material headwinds to house prices in the wider market at a time when mortgage finance remains difficult to obtain. These factors are already starting to be reflected in the data.

House prices in wider UK market under pressure

Nationwide reported an uneventful 0.1% rise in UK residential house prices in September but the three month on three month rate of change fell from 0.0% at the end of August to -0.9% at the end of September – turning negative for the first time since May 2009. The annual rate of house price inflation now stands at just 3.1%, down from 3.9% in August and 6.6% in July.

The building society commented: “Although the three month rate of change has turned negative, at this stage it is not pointing to a significant pace of decline in property value. Nonetheless, buyers appear to have a slightly better hand than sellers at the moment, as the market continues to absorb the recent increase in property for sale.”

However, it has been the unexpectedly large 3.6% drop in the Halifax house price index in September that has grabbed the bulk of the headlines, though Halifax’s housing economist Martin Ellis was also quick to point out the dangers of reading too much into one month’s data. “Volatility of the month on month measure has increased due to the low transaction levels across the market; this underlines the difficulty of getting a clear reading on the current state of the housing market.” He continues: “Looking at quarterly figures – a better measure of the underlying trend, house prices in the third quarter of 2010 were 0.9% lower than in the second quarter of 2010. It is therefore far too early to conclude that September’s monthly 3.6% fall is the beginning of a sustained period of declining house prices.”

Completing a hat-trick of negative key housing market data the monthly survey from the Royal Institute of Chartered Surveyors (RICS) also revealed an increase in surveyors reporting falling rather than rising prices. RICS said that the drop in prices “continues to reflect the high level of new instructions coming to the market at a time when buyer enquiries have been slipping.”

Value in the villages

Camilla Dell, Black Brick Managing Partner, says: “The recent data from the wider market is, we believe, more about a stabilisation of prices than a crash but it is hard to argue anything other than that conditions are worsening. A year ago prices were rising sharply despite the uncertain economic backdrop so it is no surprise that house price inflation is now easing in the face of the government’s impending austerity measures. What the lacklustre economic backdrop is doing however is creating some good opportunities for buyers. We have seen a number of distressed sellers at the top end of the country house market within an hour’s travel of London. Though we would not recommend these as investment properties given the smaller potential pool of tenants, they can often represent excellent value for those happy to live within commuting distance of London. We recently acquired for a client a property with significant acreage and leisure facilities in picturesque Henley-on-Thames for £2.75m from a distressed seller. The house was originally marketed for £6m. This scenario is becoming increasingly commonplace.”

The media has also honed in on the theme. In an article entitled ‘Cut-price country’ The Sunday Times recently highlighted the large discounts sellers are being forced to accept on their original listing price in order to get buyers interested. “In many circumstances, the price is being reduced not once, but two or three times”, the article reported.

Prime Central London – resilient

Meanwhile, within prime central London we have seen a slight increase in supply in recent weeks. Camilla Dell says the increase “provides greater choice for potential buyers and we see this as a sign of a healthy market rather than a precursor to any sharp or sustained fall in prices.”

The latest figures show property prices in prime London continue to hold relatively steady, though the pace of growth has dropped markedly from the levels seen in late 2009 and earlier this year. Savills’ prime London index showed values rising 0.1% in the quarter to end-September, with the annual price inflation rate now running at 9.1%.

Our view is that the stark difference between conditions in the wider UK property market and in prime central London will remain. While the wider UK economy is losing jobs, the financial services sector in London is expanding. This is clearly supportive for prime London rents and capital values and at Black Brick we have seen a pickup in enquiries from domestic clients in recent weeks who have been unable to source the property they want. However, any further legislation to curb City bonuses will inevitably hit sentiment.

Currency advantage boosting Asian demand

We note with interest the recent forecast from Goldman Sachs for a sharp slump in the US dollar against the pound, but do not believe the impact on prime central London property will be as significant as it might have been a few years ago given the growing geographic diversity of international demand. Indeed, the increase in demand from Asia for prime central London property has been a feature of the last few months. Potential buyers in countries such as India, China, Korea and Thailand have seen their domestic currencies strengthen substantially against the pound and it seems unlikely that the currency advantage enjoyed by potential buyers in these markets will erode significantly any time soon.

Camilla Dell, Black Brick Managing Partner, says: “The immediate outlook for prime central London property prices in general may be muted but the key long-term supports remain in place. The increasing breadth of the global economy is creating new buyers all the time, many of whom continue to enjoy significant currency advantages. With sellers forced into a more pragmatic approach and choice improving – the market in prime central London property is becoming increasingly attractive for potential buyers.”

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