It was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way.
This is a quote from the opening paragraph of the Charles Dickens novel “A Tale of Two Cities.” Slightly dramatic perhaps, but I feel it serves as a perfect metaphor for the apparent state of the UK economy and housing market.
It seems that not a week goes by without the news swinging like a pendulum clock, from recovery to relapse.
The economy is still growing, but only just. The latest GDP figures showed an increase of 0.5% in Q1 2011. Inflation hit 4.4% in March and could reach 5% which in turn has put even more pressure on the Bank of England to increase the base rate, which has remained at 0.5% for the last 26 months.
If inflation was being driven upwards by excessive demand or wage demands, then an increase would be the right cause of action.
However the rise is due to external factors such as the increase in VAT combined with rising fuel and commodity prices. Therefore a rate increase now would dampen much needed demand and only serve to push the economy back into recession.
The stock market has been quite volatile during the first four months of the year with the FTSE 100 hitting a peak of 6,091 in early February, only to fall 493 points (8.1%) to 5,598 in March due to the earthquake in Japan. The market has recovered since and is flirting with the 6,000 point barrier.
The property market has also had its fair share of conflicting data. Nationwide released figures in April showing an increase of 0.5%. The pendulum swung back in May, when Halifax said that not only were prices falling, but they were doing so at the fastest rate in 18 months.
So what’s really happening?
To really understand what the property market is actually doing, we need to get some clarity on a couple of points.
First, the quality of data used to create the monthly statistics can be flawed. For example, the figures from lenders such as Halifax and Nationwide can have a regional bias, based on where the lender is strongest, and is not based on actual transactions, but rather on mortgages approved.
Again data from property portals such as Rightmove are based on asking prices.
Only the Land Registry provides a true picture of what is going on because their data is based on actual transactions and prices achieved. In addition they’re able to provide an overall picture of the market in England & Wales, plus a breakdown of the data by local authority.
The downside however, is the 3 month delay in reporting.
Second, there is no such thing as a national housing market. The market actually is made up of hundreds if not thousands of micro markets, each with their own unique demand and supply characteristics.
What is going on in one city may differ from another. It might be an old cliché, but remember it’s all about Location, Location, Location.
By treating residential property as one single market that is either rising or falling, like an index tracker fund, many investors and their advisors often shy away and miss out on quality investment opportunities.
Imagine if you were given a sum of money to invest in the stock market, but you could only invest it in a single share. You would probably spend time researching the entire market trying to find a company which had a good trading history, was a market leader, selling a product with robust demand and limited supply combined with a strong management team.
If you were to apply this approach to residential property, you’d probably end up selecting London.
Like the title of Dickens novel, the UK property market is a tale of two cities, London and the rest of the country. Recent press would have you believe the UK property market is still in the doldrums.
They would be right if we took the March figures from the Land Registry at face value. It showed that over the last 12 months property prices in England & Wales had fallen by 2.3%. Drilling down into the regions the story appears to be the same, where cities such as Manchester and Newcastle upon Tyne had fallen by 7.19% and 4.9% respectively.
London bucked the trend having remained broadly flat with a 0.84% increase. However, if we drill down into the data and focus on Prime Central London (PCL), the London Boroughs where the Walls & Futures London Growth Fund is currently investing, the numbers tell a different tale.
Overall PCL increased by an average of 4.26% with strongest growth in Hammersmith & Fulham which jumped by 7.07%. To further illustrate the differences between the rest of the country and PCL, let’s look at the performance of the market had you invested at the bottom in 2008.
Again using Land Registry data, England & Wales increased by +5.74%, although still down 12% from the peak. London increased by 13.88%, down 4.5% from its peak. PCL outperformed the market once again. On average it increased by a staggering 20.62%, only 0.7% off peak values.
Overseas demand:
It can be easy to forget that London is one of the top cities on the planet. It’s a magnet for buyers from around the globe who either acquire trophy assets or look for somewhere safe to park their money.
During the worst of the recession, local buyers were quickly replaced by those from Europe, Russia, Middle East, India and the Far East. Overseas buyers can make money simply on currency, never mind buying at a discount.
At the extreme end of the spectrum is the recently reported purchase of the most expensive flat sold in the UK at the One Hyde Park development to a Ukrainian oligarch for £136m.
The influx of the super rich to London causes a “Ripple Effect”. Unbelievable as it sounds, millionaires are no longer able to compete to buy in “super” or “uber” prime London are forced into PCL, which in turn drives those buyers into the next area and so on.
Demographics:
When putting together the investment strategy for the Walls & Futures London Growth Fund, we wanted to focus on specific locations of high wealth with low levels of supply.
Using data from the 2001 Census we found that residents in Prime Central London tended to be from a higher socio-economic grade (AB), had a higher level of education and were more likely to be managers or senior officers. In short they were wealthier.
Finance:
Considering the overseas demand and demographic profile of the buyers in PCL, they are less constrained by mortgage finance or the lack of it. My own experience working as an Estate Agent in Fulham & Kensington reflects this with a large portion of buyers either purchasing in cash, or having large deposits.
Supply:
The amount of property in PCL is finite as there is very little space, if any, to build more homes. Therefore, the only new build coming onto the market will be on brown field sites or replacing existing housing.
So what is actually happening?
The spring market seems to have come early, with estate agents reporting increased levels of applicants registering to buy in the first two months of the year. This was not matched by sellers, who elected to wait and see what 2011 would bring.
With buyers outnumbering sellers, prices pushed forward. This was more noticeable at the top end of the market, especially family houses, as buyers moved quickly deals done before the increase in stamp duty to 5%.
Since Easter, however I have noticed a jump in the number of new properties coming onto the open market and at auction.
This is great news for buyers as the pendulum swings the market back in their favour. I don’t expect the market to suddenly fall away or crash, although the media may report this, but stock means more choice, which leads to greater flexibility in prices.
If you’re looking for a deal, now is a great time to get involved. My advice would be to focus on properties that have been on the market for a while as agents will still be bringing on new instructions at higher levels.
As we progress through the year, the press will continue to comment on the state of the property market, and with government spending cuts taking hold, the tale they tell will no doubt be filled with woe.
Do try and take it with a pinch of salt and remember that the property market is a tale of two cities.
