The UK residential property market has been significantly affected by the credit crunch, but the growing imbalance between demand and supply makes an eventual recovery in values inevitable, according to a report published today by Savills Research.
- Fundamental imbalance between demand and supply makes a recovery inevitable and the market is now in the first stages of a recovery that will be led by prime
- There is clear evidence of restored investor confidence in residential bricks and mortar which has resulted in price rises in recent months (+4.3% in prime central London in March – June)
- New autumn for sale stock could take the heat out of the market and eradicate some of the gains seen in recent months
- Prime central London forecast revised from -30% peak to trough price falls to -25%, albeit with a longer period bumping along the bottom
- Mainstream price rises appear premature and the development of a two-tier market is likely.
In Residential Property Focus, an overview of all sections of the UK market, Yolande Barnes says that the housing market is now in the early stages of a recovery. But, despite early signs that mainstream values are following the prime markets in showing price increases, she believes that talk of a sustained recovery in mainstream market is premature. Savills Research anticipates that prime markets, (approximately the top 5% to 10% of property by price, quality and location), will lead the recovery and outperform the mainstream in the medium term as they are less impacted by limited mortgage finance and unemployment.
Prime central London: Pent up demand, an acute shortage of premium stock, and improved buyer sentiment have all combined to boost activity and values in prime central London and other prime markets. Transaction levels, are well up on the extremely low levels seen in 2008 building towards those seen in 2006, although the market is still dominated by equity-rich buyers. Unusually for July, when the market is usually affected by a seasonal downturn, applicant numbers have barely faltered. Likewise the ratio of new applicants per property (a key indicator of future prices) held firm in July at a level much more akin to that of 2007 than 2008.
The autumn outlook: Savills expect that the supply of properties could improve in the autumn as growing prices attract more vendors back into the market and pent-up supply from delayed sales is eventually released. This could again upset the fine balance between supply and demand, again tipping it in favour of buyers. In this case, new stock for sale will take some of the heat out of the market.
Under this scenario, the prime central London market is likely to correct downwards by just over 3% by the year end. This will eradicate some of the +4.3% rise seen in the second quarter. Says Barnes: “Such falls would be consistent with the early stages of a market bottoming out and a period when prices ‘bounce along the bottom’. There is now clear evidence of restored confidence in bricks and mortar, not least as an investment vehicle, and we expect prices to stabilise through 2010 before returning to more sustained growth from early 2011.
Revised forecast: “We have revised our forecast in terms of the shape of the recovery, foreseeing a longer period of bumping along the bottom before steady recovery but against a smaller overall downward adjustment. We are now stating that prime central London values will at no stage fall below -25% from their 2007 peak, which is an improvement from our original -30% top to bottom forecast.
In other prime markets, small price rises have been seen in the commuter strongholds of Surrey and Kent, and some of the established prime locations of the South such as Bath and Winchester. Turnover is definitely up in the regional prime markets, with July transaction levels on average +16% on the July 2008. Further north, transaction volumes have been suppressed for longer but there is definite evidence of a lag, implying that they will follow the southern markets later.
Mainstream rises may prove premature: The same peak to trough -25% adjustment forecast for the prime regional markets is also forecast for the average of the mainstream markets. The variations in performance between regions, local markets and different property types is likely to come in the recovery. Mainstream, mortgaged markets are expected to be slower to recover due to continued constraints on finance. They may be further, negatively affected as and when interest rates start to rise.
The twin forces of unemployment and mortgage rationing are likely to predicate against a rapid and sustained price rise in most mainstream markets. Further falls cannot be ruled out although they are likely to be small, interspersed with short periods of price growth and may occur over a longer period than for prime property.
Two-tier mainstream emerging: It is high levels of equity and outright ownership in some sections of the mainstream market that distinguish this downturn from previous ones. The domination of a low volume market by the equity-rich goes a long way to explaining the scale and unexpectedly early price rises seen in leading mainstream indices. The big question is whether this is sustainable or not. On balance, Savills research department thinks not yet.
Says Barnes: “The development of a distinct two-tier mainstream market is an inevitable, probably irreversible consequence of the current downturn. Sustained and more widespread growth will be dependent upon low interest rates, an improved accessibility to mortgage finance and a recovery in economic growth.
“The regional distribution of economic and social factors – not least repossession and unemployment numbers – will be reflected in the ability of house prices to recover and lead to deep variations on a region by region and property sector by sector basis.
“Those best placed to take advantage of the recovery are those investors and developers who entered the downturn with low debt levels, access to equity and adaptable skills. These will become the new and successful players in the residential property market in the future.”