Gloom stalks the housing market but ‘hockey stick’ revival is on the cards



Edinburgh and Glasgow prime property has fallen by around 15-20 per cent since the peak of Autumn 2007.The prime market was initially more resilient, especially during the first half of 2008 but the final quarters of 2008 showed a sharp decline.Therefore, the year 2009 has opened with the probability of good and bad prospects for the residential property market.

To dispense with the bad first, the current graph showing a continuous fall in values is likely to continue its downward trend for some time. On a more positive note, the end of the fall will not be followed by a lengthy bottoming out period: there will be a “hockey stick” turnaround, with the graph showing values increasing at a faster and sharper rate that the earlier decline.

The great imponderable is: when is this actually going to take place?

It is, of course, still possible, that there will not be a revival for more than a decade (as happened in the US during the period 1929-41, when it took a world war to lift that country out of its slump). However such a scenario in today’s terms is almost unthinkable so this analysis is based on the presumption that the property market will start to regain lost equity within the short- to medium-term.

While I would dearly love to be proved wrong, any commentator looking to 2009 for a revival is being unduly optimistic. The two key factors that still remain are liquidity and confidence. We badly need to see light at the end of the tunnel. This may come with further rate cuts or through Barack Obama’s
new financial stimulant that will install global confidence but ultimately we need to see much more free funds lubricating and drive the market.

A more likely scenario is more of the same – i.e. house prices during 2009 maintaining the level of decline that characterised 2008. Period property in Edinburgh and Glasgow fell, on average, by 15 – 20 per cent during last year and it is not being over pessimistic to predict an overall decline of circa 25 - 30 per cent for the 24 months between 1 January 2008 and 31 December 2009.

In a report last October, I predicted that the market fall would bottom out by the end of 2009; now the spring of 2010 seems more realistic. The banks obviously require a period of correction and consolidation but they will, eventually, have to start greatly increasing mortgage funds to the general public but given the current dearth of mortgages a significant improvement may not occur until next year.

If that happens then the move will end a mortgage famine that, by then, will have lasted for at least 18 months, which drives my belief in the “hockey stick” scenario, with values starting to rise quickly very soon after they have bottomed out.

The reason for this is quite simple. During that 18 months of inactivity in the market, literally millions of people will have undergone regime changes to their personal and professional lives that require them to move house – marriage, divorce, a first child, growing adolescents, children leaving home, new employment (or, for that matter, loss of job), retirement and death. For once, that frequently misused term, “pent up housing demand”, really will apply to great swathes of the country.

But it would be wrong to see a complete revival in terms of a relatively short period. A house that falls by 50 per cent then has to increase by 100 per cent before it returns to the value that existed before the decline set in. Therefore it may be some time – perhaps not until 2013 – before today’s property owners see a net increase in equity.

Although my prediction, up to now, may have been somewhat gloomy there are still positive vibrations to be had from such an outlook.

Even if the fall in values continues into early 2010, by the autumn of this year investors may start to return to the market, anticipating that it will bottom out relatively soon. Indeed, the small rate of interest currently achieved on deposit may encourage some investors to enter residential property beforehand. With returns on savings of just 1per cent or 2pc, there is much to commend the cash purchase of a property in a prime location even if the fall in its value has not yet bottomed out because the potential net return over three to five years will be so much greater than savings, even if interest rates start to rise again.

Indeed, in the last three months of 2008, an otherwise dismal sales quarter was given something of a mini-boost by a small but significant number of investment buyers, who were prepared to take a paper “hit” on property values falling further in the short term on the basis that patience and perseverance will eventually bring a substantial capital uplift.

Meanwhile, home-grown demand may well be enhanced by investors from overseas, given the fall of the pound in relation to the euro and the dollar, especially as it is forecast that the low parity rates will remain in place (and perhaps get even worse) for some time.

As regards the rental market, I do not see any reason to alter my earlier view that rentals will not, overall, increase by any more than 5 per cent this year and, probably, next. However, this is against a background of a substantial rise in rents during 2008, although there was some falling back in the final quarter.

There are two factors driving the contemporary rental market. One is that the shortage of mortgages means many individuals and couples have no alternative but to rent, even if they would prefer to buy. The other is people who, despite the money supply being tight, still have the wherewithal to buy a home of their own but prefer to rent for the time being, on the (quite logical) basis that the market still has some way to fall and that prices will be cheaper (not just relatively but in actual terms) six months or more from now.

My one concern about short- to-medium prospects for the letting market is a highly likely drop in demand from corporate organisations as a result of executive job losses and companies cutting back generally on non-core expenses. In this respect, Edinburgh – with its heavy reliance on banking and financial services - may be more adversely affected than Glasgow, which has a large local and national government jobs base and where the commercial sector is much more evenly spread than in the capital.

On the other hand, “belt tightening” within the corporate sector could also mean firms eschewing expensive hotel accommodation for more cost-effective use of apartments held on lease. There is, and will continue to be for some time, a very dark cloud over the residential property market but some silver linings are not too difficult to detect either.

DAVID ALEXANDER/site/uploads/filemgr/redbanner_whitetext.gif!