I’m conflicted, it seems that no matter what mainstream news source I turn to, there is some statistic or league table or index or expert telling me that the UK housing market has reached capitulation and is show the first “green shoots” of recovery. Yet reality is telling me somewhat different things.
House pricing indices, sales figures, mortgage statistics, listing indices, even the government, everyone’s’ at it. According to the UK taxman, in June, the number of houses sold worth more than £40,000 was up by 15% compared with May. Aside from the official figures there are numerous property websites calling the bottom of the pricing slide, though one can’t help thinking that these corporations have somewhat of a vested interest in the listings business.
As I’ve already mentioned, each day we are presented with conflicting data from many different sources telling us all sorts of interesting things; sales figures are up, prices are down, more mortgage lending, lower volume of mortgages for new homes. Each month paints a different statistical picture and it is therefore, in my opinion, impossible to predict the overall mid-term direction of the market.
Let’s look at the Spanish housing market and see what lessons we can learn.
The official figures from the Ministry of Housing in Spain don’t paint too dismal a picture at all, in fact if you take the data on face value the market has suffered only an 8.5% drop in the capital value of real estate over the last 12 months from the mid-2008 peak. That’s pretty good, given that house prices in Spain more than doubled since 1998. But in reality, the situation is a lot worse than that, a lot worse.
Tinsa, the independent house price index compiler believes average house prices are 13% down from peak and even worse on the coast with the Costas showing a drop of 18%. I speak with Property Developers and International Estate Agents every working day and I also transact on bulk deals involving 10 to 100 properties and I can tell you that the reality is that I am buying and selling portfolios from Banks and Developers at least 30% below peak prices of 12 months previous.
As with all commodities, supply and demand plays a very influential hand in regulating price. From 2001 to 2007 Spain experienced the ultimate building boom. The Spanish built 29% of new EU homes despite having only 9% of the population. The end result has been an oversupply of 1.5 million unsold homes.
With no-one to buy the surplus homes, now that the housing bubble has burst, home sales have nose-dived by more than 30% in the last 12 months. Literally hundreds of well-know, reputable developers have gone bankrupt, owing billions of €uros to the banks. And said banks are now being forced into taking on batches of empty houses no one else wants, or are, in a lot of cases, incomplete. This of course presents opportunities, as the banks are suffering in their own liquidity crisis they are willing to write down and effectively write off much of this lost capital and accept low, low prices provided buyers will take the whole of the stock and pay in cash. Once again cash is king.
Another unavoidable issue bought on by oversupply is the number of properties for rent. In Spain we have seen an increase of 55% over the past two 24 months alone to 3.3 million, the highest since records began, rents in cities have begun to drop for the first time in seven years – by up to 8% so far. Remember that the real value of property is intrinsically linked to the yield.
Rents can only fall further, which will depress prices even more. The jobless rate, at 19%, is the highest in the EU and is set to climb even higher, which will only add more forced sellers.
British house prices are set to fall further too
OK, so the one saving grace for us here in old Blighty is that we don’t have the huge level of surplus property that Spain does.
But received rents over here are falling too, many of my own clients with mid-size buy-to-let portfolios 10 to 100 properties) are telling me the same thing, gone-away tenants, tenants losing their jobs and tenants handing in notice because they can rent cheaper elsewhere. At the same time the supply of rental property has risen dramatically (once again a short-term oversupply. And while Britain’s unemployment rate is only 7.6% at the moment, the dole queues are bound to get longer. That will mean lots more forced – and desperate – sellers.
I personally believe that the main problem for the UK housing market is affordability – or the lack of it. Let’s stack it like an investment; the average 1st time buyer has circa. £30,000 saved as a deposit, and mortgage lending, such as it is, dictates that with a loan to value of 70%, the most a first time buyer can afford is £100,000. Even if more 80% LTV products come on to the market then that means affordability still reaches only £150,000 without taking into account buying costs. Prices are still way above levels where the market can rebuild from. The Nationwide Building Society’s first-time buyer affordability index, which gauges initial home loan payments as a percentage of take-home pay, is still miles away from a market trough if the last housing downturn is any guide.
So prices have to fall further so that new buyers can get on board. But that means that current buyers are likely to see the value of their purchase fall substantially before it bottoms out. That’s bad news for anyone who’s been persuaded to act as guarantor for someone else’s home loan, for example – the Council of Mortgage Lenders recently reported that in the past two years the percentage of first-time buyers being helped by their parents to put together a deposit has doubled to a staggering 80%.
About the Author: David Garner is Managing Partner of David Garner Consulting and also hold a position with BRIC Group as a Senior Portfolio Manager. David advises a broad range of private investors, groups and industry professionals on a diverse selection of real estate related solutions, from land acquistion, portfolio management and fixed return investment vehicles. David is availabel for consultation on firstname.lastname@example.org