Phil Spencer on the property market

In the weeks since I wrote my previous column for Country Life, the continued ‘demise’ of the housing market has been widely commented on, especially as several indices have reported weak data. An imbalance in supply and demand is one reason the market has weakened. According to Hometrack, there was a 6.7% drop in new buyers during May. Yet supply has increased, with the number of properties for sale up by 20% since February. Demand has been affected by confidence and the restricted mortgage market.

New data shows the number of mortgages approved for house purchase fell from 63,000 in March to 58,000 in April, about half the level of a year earlier. New data from the Nationwide shows an even more extreme slowdown in May, but I prefer to look at changes in three-month data, as it gives more of an overview. Looking at the graph, we can deduce from the percentage price drop shown in Nationwide figures that average values of houses are now back to levels seen in early 2007.

Increasing uncertainty continues to weaken confidence, and we are still seeing a virtual stand-off between buyers and sellers. Buyers have been holding out for further price falls, and sellers have been refusing to budge. Everyone seems to know it’s been raining but just not on them.

The net result is a 34% fall in the number of transactions, which is widely predicted to worsen through the summer. If an increasing proportion of transactions are forced sales, this would have a more serious impact on the housing market and, indeed, the economy. Economically, we are entering a new phase. In recent years, house prices have shot up during a period of low general inflation and, consequently, we have benefited more than we have been able to identify.

‘Real’ inflation-adjusted house prices were rising more sharply than we could actually appreciate. Now, the opposite is true we have falling prices in an environment of rising inflation, which means that ‘real’ house prices are declining more sharply than cash prices. This could get serious. The bitter pill for the housing market is that this new inflationary environment may prevent the Monetary Policy Committee from cutting interest rates any time soon. Notwithstanding this, some people still wish to move or need to sell, so, as far as the national mainstream market is concerned, prices are likely to come down further as the number of unsold properties climbs. Therefore, I expect things to get worse before (assuming the mortgage market has eased) conditions start to improve.

The expected pockets of resilience will be for quality family homes and anything in the super-prime bracket. Consequently, the very top end of the market remains the preferred sector to be involved in, and, although even London is now being affected by the down-turn, the super-prime market is outperforming the mainstream right across the country.

The £5 million-plus market is particularly strong, which is a result of this ‘wall of wealth’ chasing a finite amount of property. For the time being, it seems the more you spend, the safer you are and not just in London. I was involved in a bidding situation earlier this month on behalf of one of my Garrington clients for a special house in Devon with a guide price of £5 million. There were six other British bidders (no foreign money), and the eventual price was in excess of £7 million.

The best sells; the rest is sticking. It goes without saying that a downturn in any market will present opportunities, and the property market is no exception. I keep meeting wealthy investors looking at setting up vulture funds, and there is certainly no shortage of capital arising from 15 years of economic prosperity. It always surprises me that, when the market softens, so many people trading upwards fail to see a potential drop in price as a relative one, which can be more than recouped by purchasing under similar conditions. But that is precisely what ‘sentiment’ is all about, and the reason why it affects activity to such a great extent.

If you want to move now, set a realistic asking price and don’t look for a new home until you’ve found an interested buyer, or you run the risk of negotiating both deals from a weak position. The costs of moving are steep, so when buying, this is the time to be picky and price sensitive. Always keep an eye out for opportunities to add value in the future and thus reduce the necessity to move again. There is no denying that we are in the midst of a downturn, but all markets are cyclical, and history shows that house prices in this country have an upward trend.

There are many disadvantages to living on an increasingly popular island, but, although it may not feel like it right now, we do have a housing shortage and an increasing population which will support house-price growth in the years ahead. Meanwhile, let’s not talk ourselves into depression, and try to remember that a house is first and foremost a roof over our family’s heads. For more information about Garrington Home Finders, visit www.garrington.co.uk