The High’s and Low’s of the UK Property Market
Hamptons International 2008 Analysis and 2009 Predictions
The Crunch: UK Residential Market 2008
Key Figures
- House prices have fallen by around -25% since the peak of the market last year (July 07)
- The top end of the market (£2m+) was initially more resilient. However, it has now fallen back in line with the mainstream market
- Sales applicant numbers have dropped by -46% Year-on-Year (YoY)
- Transaction figures have dropped, with exchanges down -44% (YoY)
- Average rent drop by 5-10% across both London and Country (YoY)
The UK residential market in 2008 witnessed a distinct decline from the peaks of 2006 and 2007. Depressed volumes and a sharp drop in house prices, dominated the market and headlines in 2008.
The housing market started the downward trend shortly before the beginning of 2008. At the outset, there was a steady drop. However, with the growing instability of the financial markets, a steeper and faster decline took place. Heightened by a lack of consumer confidence, banks tightening lending criteria, a lack of liquidity and job insecurity, the market began to come to a standstill.
Hamptons International figures indicate that prices will have fallen by around 25% by the end of 2008 - since the peak of the market last year (July 07). Transaction levels reveal that exchanges will be down by 44% and completion levels in 2008 are likely to be the lowest for a decade.
Properties in the prime areas and at the top end of the market (£2m+) were initially more resilient. However, they have now fallen back in line and experienced similar drops in price to the mainstream market.
With the sales market slowing, the rental market experienced a distinct lift in 2008, with many potential buyers turning to the rental sector. The first two quarter’s of 2008 were certainly a landlord’s market, with more people wanting to rent than there were properties available.
As the year progressed, this situation softened - with the rental market becoming extremely price sensitive and more property available than tenants requiring it. This trend has resulted in the average rent drop by 5-10% across both London and Country.
In general, for many residential agents, core business in 2008 revolved around four key market drivers - divorce, death, displacement & debt - illustrating the fundamental and base nature of business.
The 2009 UK Residential Market: What’s in Store
UK Sales Market
Key Figures
- House prices to drop by a further -5% in 2009, taking overall drop to up to -30% since the peak of 2007
- UK residential market to ‘bottom-out’ in spring 2009. No market growth until 2010
- In 2009 we expect the BoE base rate to continue to trend downwards
- Lack of bonus money funding leading to a lower level of property investment
- 30% fewer estate agents in business during 2009
With the recent Bank of England base rate cut and Alastair Darling’s decision to support the banking community, we hope to see increased confidence in the UK residential market during 2009.
However, we also realise this increased confidence will not happen overnight. Any uplift in consumer confidence will be dependent on factors such as mortgage availability, unemployment levels, the degree and duration of recession on the high street and overall global economic outlook.
Unless the economy slides into a deep recession, we predict buyer levels will remain stable for the early part of the year, with a slight increase in the latter part of 2009. A good percentage of this increase will come from those who need to move, but have delayed due to a lack of confidence in the market. A strong percentage will also come from first-time buyers, following drops in interest rates, the lowest house price levels for four years and increased access to mortgages.
The distinct lack of bonus money funding will lead to a lower level of property investment when compared to previous years. However, the favourable exchange rate for overseas investors will ensure a steady stream of international buyers continue to flood the market.
However, the challenging conditions of 2008 will have taken their toll on the residential agency market and we anticipate that there will be 30% fewer estate agents in business next year, with clients gravitating to the more established agencies.
UK Rental Market
Key Figures
- Stock levels will remain high in the early part of 2009, currently 40% up on the previous year
- While the sales market is virtually stagnant the number of tenants looking for accommodation will be up 10-15% on the highs of 2008
- Economic uncertainty means that more and more tenants will look to renew their current lettings deal at the end of the lease; we expect this figure to remain higher than 70%
2009 will start quite slowly for the rental market. Rents will continue to fall in the early part of the year, with the oversupply of stock. Higher end stock will continue to be harder to rent and activity will continue at the lower end of the market. This will certainly be the case with one and two bedroom properties, as a number of first time buyers continue to rent instead of buy.
If the Bank of England implements another interest rate cut and helps to restore confidence and stimulate lending activity again we will see a drop in lettings stock, followed by an increase in tenancy terminations and rental rises. However, the increase in tenants will continue as long as confidence remains low and employment unstable.
Overall it is the corporate market which poses the biggest concern for 2009. If this demand decreases, which is inevitable in the light of redundancies at most major city banks then central London and house markets in all areas across the UK will suffer.
Taking all factors into consideration, we are predicting little rental growth in the overall lettings market in 2009 and any growth there is will be in the sub £700 per week category.
UK Development & Investment
Key Figures
- 5% - 10% decrease in sales price during 2009
- Distressed stock will see discounts of up to 40% in some cases
- Investors will be discount driven
- We anticipate higher transaction levels than 2008, with a 10% increase due to cheaper cost of borrowing, price realism and increased liquidity in the banking sector
During 2009, we predict a decline in value for the development sector, albeit at a slower rate than 2008 with a possible upturn in sales volume toward the end of the year.
The availability of liquidity in the banking sector and the ability to provide low cost finance will have the biggest impact on the 2009 market. When this comes back to the market, consumer confidence will begin to return and whilst prices will still be at reduced levels, the volume of these transactions should increase significantly.
Buyer levels will remain stable for the early part of the year with a slight increase on the end of 2008. However the feeding through of finance from banks and lenders should see an increase in these levels towards the latter part of the year.
We expect to see investment buyers coming to the fore as more and more distressed stock becomes available.
Mid market buyers who have cash but have been awaiting the 'bottom' of the market will also start to spend as they gradually start to call the bottom of the market.
Bulk/long-term investment will take place as distressed stock becomes available at large discounts (up to 40% in some cases).
With regards to sales price, we predict a 5% - 10% decrease in 2009 dependant on the exact location and type of product. Sellers need to be realistic on value next year and assess the needs and financial abilities of the target market for their product. Buyers, whilst aware of potential discount levels should not be too quick to look for arbitrary value reductions, but should consider the quality and potential of the product and how it fits their requirements.
Investors will obviously be discount driven and should look for product in this bracket, but mid-to-long term owner occupiers should remain focused on their own requirements and should not sacrifice these factors for the sake of a perceived discount.
Top Investment Spots for 2009
London:
(1) Islington: It borders the Kings Cross area which is currently experiencing massive regeneration. Property values were hit hard in 2008, so the area should recover more strongly as result.
(2) Paddington. The regeneration continues and there is a good cross-section of stock at the lower to middle end of the market.
(3) Clapham. Good quality development stock will be available at levels previously seen in areas of lower value such as Tooting and Wandsworth.
Country:
(1) Windsor. Highly commutable – with trains to Waterloo and Paddington – and more affordable than London.
(2) Bath. Good quality housing and a hotspot location at all times.
(3) Oxford – stable student business, so great return and extremely reliable and robust market.
The Future – What’s in Store
We have faced an incredibly challenging period in the UK residential sector over the last 12 months, and as we move into 2009 market analysis points to testing times ahead.
What happens in the financial community and government responses to the situation will dictate the strength of the residential sector in 2009.
Shoots of optimism are badly needed. Whether this will come with further cuts in interest rates – hopefully resulting in banks passing on benefits to borrowers and relaxing mortgage criteria - or through Barack Obama’s new global leadership, helping to instil the buyer confidence that the market is crying out for is yet to be seen.
However, with distressed sellers prevalent and the bottom of the market likely to be reached at some point in 2009, the year ahead might be the best buyers market we have seen in many a year. Likewise bulk investment buyers will be provided with opportunities to achieve record high initial yields on acquisitions.
The market for overseas investment in the UK, and particularly prime London will continue to be very attractive as we move into 2009, with the strongest performance expected in areas such as Kensington, Knightsbridge and Belgravia. As a result of strong currency gains against Sterling buyers with Euros, US Dollars, or UAE Dirhams, overseas investors can immediately save upwards of 25% on last years price.