Market upheaval continues but ‘location, location, location’ still name of the game

14/01/2010

Well, that’s 2009 over; 2010 has arrived and with it the start of the second decade of the 21st century.

Only it’s not. Just as New Year’s Day 2000 did not mark the beginning of the 20th century, neither does today, 1 January 2010, take us into the second decade of that century; we’ve actually got another year to go.

But, hey, who wants to show themselves up as a pedant?

Just as 2000 (which was actually the final year of the 20th century) had the ring of something new about it so does 2010; the “noughties” – as they were called – have passed and I’m happy to go along with the general consensus that, for all intents and purposes, we are into the second decade of the 21st century.

Just as a new year brings with it hope of renewal, a new decade suggests even greater change – hopefully, for the better.

Unfortunately we’d be foolish to presume that a significant movement in the calendar is in itself a guarantee of better times ahead.

When the credit crunch really started to hit, sometime in the middle of 2008, there was hope that, with the “noughties” behind us, 2010 would eventually mark a new beginning for the property market. At one time I thought the same, although this was based on a mixture of instinct, “hands on” business experience of the market and listening to various commentators, rather than something as abstract as with moving on from the noughties.

Reluctantly, I’ve since come to the view that if we actually manage to get through 2010 without any further decreases in values then it will have been a relatively good year. Hopefully the graph will have reached the bottom by the end of the year – even by the autumn, if we’re lucky – and that prices will start to rise again. The big imponderable is if the recovery will be of the “hockey stick” variety or “V-shaped”; the former suggests a steep rise in house price inflation soon after after the bottom has been reached; the latter a long period of recovery before prices return to what they were in the late summer of 2007.

My own feelings show a bias towards the latter scenario for a number of reasons, not all of them directly connected to the property market. These include the return to VAT at 17.5 per cent (from today’s date), which will increase overall living costs; continued rationing by the banks and building societies of mortgage funds; uncertainty until the next General Election and even more uncertainty if the result is a hung parliament; large increases in taxation and/or cuts in public spending whoever wins the election, with the prospect of VAT rising to 20 per cent.

Consequently, it seems to me perfectly sensible, rather than deliberately pessimistic, to predict that 2007 prices may not be restored until at least the end of 2012, which means that the property market will have been in recession for at least five years.

But it is not all doom and gloom. Many of our private landlord clients have seen the values of their investments – on paper at last – fall over the past two years, in some cases quite significantly. But this really only takes on any relevance if owners wish to sell, and this has affected only a relatively small minority. Meanwhile, those with heavy financial gearing have, of course, been enjoying the benefit of the lowest interest rates for half a century.

In addition, the dearth of property sales (largely caused by the aforementioned restrictions on mortgage funding) has led to the demand for tented property reaching a higher level than at any time since the mid-1990’s, meaning that owners are enjoying regular rental income and that voids are few and far between.

Significantly, the rental properties that have undergone the shortest drop in values in percentage terms and whose rental levels are holding up best of all (an exception being the relatively small town house sector) are those that were chosen by their buyers first and foremost on the basis of location.

Within the field of property investment, choosing a house or flat on the basis of where it is rather than what it is (or how good it happens to look) sorts out the men from the boys.

Even with the market turned on its head over the past two years, the old adage of success being down to three things – “location, location, location”- will be as relevant in this new decade as in all the other ones that have gone before.

DAVID ALEXANDER, PROPRIETOR