UK Property – Are we really doomed to a double dip?

By Martin Skinner

After a rebound in property values and a surge in listed property equities in the spring/summer much of the early autumn discussion has been around the risk of renewed downward pressure on values in 2010.  Is this just irrational pessimism or is it a real probability?

I will focus my discussion on the London Residential Property market where I have most of my experience.

The job market tends to lag the broader economy because understandably after a shock like the one we’ve had companies tend to want to bolster their balance sheets and deliver good profits before they take on new staff.  This inevitably weighs heavily on sentiment.

In recent weeks transactions have actually been very good, particularly in the best London locations.  Noticeable trends have included:

  • The London residential lettings market tightening dramatically as accidental landlords have ceased depressing prices.  We have just been through the peak lettings season and the excess supply has been soaked up.  Lettings agents I know in both West and East London are either fully let or very short on stock and asking prices are heading up.
  • Opportunistic  home buyers and renters are finding the market a lot more competitive – they are having to adjust their expectations in order to secure their dream pads.
  • Residential sales agents in prime West London talking about being run off their feet.  With the Sterling exchange rate being so low foreign investors are competing for glamorous properties as if we were back into boom territory.
  • Supply remaining near record lows.  Without development finance practically impossible to secure and with developers still reeling from the crunch it will take a long time to increase substantially.  And remember we were in a ‘housing crisis’ before the crunch.
  • I even see from a Property Week article that London office lettings have also increased considerably and some commentators have quietly whispered about future undersupply – remarkable considering where we were 12 months ago.

And yet property and banking stocks have dipped noticeably and bank lending is still very tight indeed.  Why is that?

The answer is likely to lie in a couple of key places:

  • Price increases moderating – value drops were exaggerated on thin trading on the way down and when the dreaded depression was averted they jumped back (like a rubber band).  This had to slow once the initial jump had occurred.
  • Surprisingly bad Q3 GDP figures – the 0.4% drop was contrary to expectations of a return to slow growth.

Taken together and compounded by continuing increases in unemployment people have understandably been worrying about their futures.  Reassurance is needed.

Since I began writing this article two key announcements have been made so I’ll just cover them briefly:

  • The Bank of England (BoE) has kept rates at 0.5% and committed to a further £25bn of Quantitative Easing (QE).  If you read my news review two weeks ago (and the links from it) you’ll have seen that the hope was for £25/30bn.  So this is good news, as expected, and will keep the foot on the accelerator until the recovery is expected to have achieved broader traction.
  • The Nationwide building society, who are broadly considered to have the most accurate report, released their house price inflation figures for October – up 0.4% for the month which takes the annual figure into positive territory for the first time since March 2008 at 2.0%.

As I commented just last week economists are having to look at entirely new models for their forecasting so it’s harder than ever to get any form of consensus on where the market is going for the next few years.  Luck supposedly favours the bold  however so I will endeavour to give you a property investors view on where the market is heading.

I believe:

  • In London residential both rents & prices will steadily rise.  The wealthier areas will rise faster – cash buyers will continue to dominate until debt becomes more accessible.
  • The additional QE and sterling weakness, ironically as a result of weaker than expected (and probably incorrect) Q3 GDP figures, will boost the economy and although next year will still be nervy and mixed there will be growth, sentiment will improve and property values will rise.
  • Unemployment will not rise above 3m as the UK’s relatively flexible labour market allows workers to change jobs and/or become self employed reasonably easily – the rise of the ‘Individual Capitalist’ as Penny puts it in her book will help a great deal.

This may seem surprisingly upbeat to many so I will balance it with some thoughts on  areas where real dangers still lie ahead:

  • Shopping centres – have been overbuilt and in some cases will be knocked down before they are ever occupied.  The trend towards shopping online will continue and only those that provide a great experience as well as product will attract.
  • Secondary locations – will always suffer more than primary locations if anything goes wrong.  Government spending cuts are very likely if as expected the Tories win the general election next year.  These will hit regional areas, particularly in the North, hardest where the economy is most dependent on the government for support.  The North-South divide will become very evident.
  • Longer term interest rates – will have to go up at some point.  Anything below 5% is considered to be expansive (encouraging both growth and inflation).  This is likely to take a quite a while however when it does come it will hurt those that have weak incomes.

I’ve always focussed on higher income variants of property in the best almost prime locations (i.e. Zone 2 in London) because I believe it enables you to benefit from the outperformance scarcity brings while still generating a high enough yield to buffer you against potential future cash flow challenges (like rising interest rates).  And I still do.

If you are looking to buy now also consider sticking to the locations you know best i.e. within a maximum 30 mile radius of your home.  It’s easier to manage when things go wrong and you have a much better chance of buying well & developing well.  And don’t rush – select your purchases carefully after researching them well.  There will continue to be good opportunities to buy next year so don’t go off half-cocked.

Do look to increase your exposure to London residential over the next 12 months however if you are in a position to do so – we aren’t doomed as some may have us believe.

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