CRISIS ? WHAT CRISIS?

05.12.2018

As we’ve once again had the Governor of the Bank of England Mark Carney repeating his doomsday scenario for house prices in the event of a No-Deal Brexit, we thought we would post again our article from the November issue of the Ham and Petersham magazine. Apart from having a very negative effect on small businesses like ours, we don’t actually think it holds up to examination.

In November Carney speculated that  house prices in the UK could fall by a third. We immediately felt the effect of that one – the next day one of our buyers decided to pull out of a purchase saying this prediction “just makes me very nervous’. Of course, it can sometimes be appropriate for a Central Bank Governor to make people nervous. But usually they do that when they think people are too optimistic and spending too much, – not when people are already nervous to begin with. From the perspective of a small business it’s not helpful to throw more petrol onto the flames of uncertainty. Nevertheless its  still odd why people take a prediction as the gospel truth. Its just a guess, even if its an educated guess. We often get people coming into the office to say they’ve read in a newspaper that house prices are going to go up by 10% or fall by 10%. If only we knew, – we wouldn’t be working 7 days a week for a start! As someone once said ‘it’s very hard to make predictions -especially about the future’.

Of course if the people making the predictions have a solid previous track record then it would hold more weight. Unfortunately the predictive record of the Bank of England is patchy. When he was first appointed, Mark Carney said he wanted to provide ‘forward guidance’ on the likely direction of interest rates. Although these are actually set by the Bank itself via its Monetary Policy Committee, they haven’t even been able to predict these consistently. The ‘guidance’ has sometimes flip- flopped so much that Treasury Committee MP Pat McFadden famously referred to Carney as behaving like ‘an unreliable boyfriend.’

Actually the spectre of house prices falling by a third doesn’t really stand up to the evidence of past crises. However catastrophic (or not) Brexit turns out to be, will it be worse than the global financial crisis of 2008? It’s not that long ago, so just cast your minds back there for a second. We had investment banks, building societies and mortgage lenders going bust. Banks wouldn’t even lend to each other and it became virtually impossible to get a mortgage. The number of properties changing hands locally fell down a lift shaft. So what happened to local house prices in that scenario. Did they drop by a third? No, they did not, they dropped by just over half that. From the peak to the trough of that crisis, – which was an international crisis and not just a UK one, – house prices in Richmond Borough dropped 19% and Kingston Borough a nearly identical amount.  Of course that’s a serious rout and extremely painful if you bought a property just before those prices dropped. Yet despite that fairly recent example, I often hear the view expressed by local people that, whatever happens to the housing market in general, somehow our area won’t be affected. Unfortunately I have to tell you we aren’t immune to wider macroeconomic trends. But what I would say is that, on past evidence, even if there were a drop following Brexit, our area does recover its losses very quickly. So although house prices dropped 19% between December 2007 and September 2009, in fact the whole loss was recouped within the following 17 months. By February 2011 we were back to where we started and then prices moved on significantly from there. When prices drop, it’s not long before people sitting on the sidelines in a sought after area sense a buying opportunity to acquire a property at a price that may not be around for long. And once buyers sense prices are going up again, they return in numbers.

Even in uncertain times, dangle a carrot in front of people and they will respond. For example  we recently marketed a three bedroom semi detached house on Richmond Road on Kingston which needs lots of updating but presented an opportunity to extend. Despite everyone’s general caution, there’s still plenty of interest in something that looks like a good deal. We had over 30 viewings on our launch day and a lot of offers. My point here is not about this particular house but the more general point that if people believe there is an opportunity they will buy. Any opportunity to move into property ownership or to upsize at a lower than average cost in this area will attract interest, whatever the economic backdrop. Prices only fall so far before demand and supply kicks in. And by the way that sale has already successfully completed.

The other safety net underpinning prices is of course the fundamental issue that demand for housing outstrips supply. Until there is lot more housebuilding, or our population demographics change, any trough in house prices will probably bottom out relatively quickly. Aspiration to own property remains very strong, there are ever more ‘households’ as people live longer, split up more and live on their own more, but the number of new builds in both the public and private sectors is constrained. Indeed the imbalance between supply and demand is still increasing.

But of course its obvious from talking to our clients every day that lots of people are currently sitting on their hands waiting to see how Brexit turns out, or at least to get a better idea of the direction of travel. People are postponing purchases until they have greater clarity and because they think prices might be lower next year. But no-one knows, -if there’s more clarity, particularly if it has some more positive connotations, the mood might change and all those buyers sitting on my hands might suddenly all turn up together and prices could go up. The market is in a sort of artificial balance at the moment because we have potential buyers holding back but equally we also have potential sellers holding back. I go to see plenty of people who would like to move for one reason or another, but are reluctant to put their property on the market at the moment because they feel they won’t get a good price. Paradoxically they may be better doing so at the moment when there is less competition. But who knows, – we breathe in a very unstable atmosphere at the moment and I’m sure we can all imagine the possibility of totally different political and economic scenarios next year, so its completely understandable that people might sit on the sidelines for now.

There are also understandably plenty of people, especially younger people, who would welcome a drop in house prices as a move to greater fairness. Indeed as prices have flattened off over the last year we’ve had more younger buyers and first time buyers than we’ve seen for a while. They’ve also had more opportunity because buy to let investors are shying away from London and the South East and buying instead in the Midlands and the North, where yields are bigger. This has presented an opportunity for younger first time buyers to come in at our entry level. But they’re not the only group constrained by very high average prices. I regularly visit growing families who would be more comfortable with another bedroom or a larger garden. 15 or 20 years ago they would have simply sold their existing property and bought a bigger one. Unfortunately, now the cost of that additional space is so much more than their current property, and the costs of moving are so high, they just stay where they are. High transaction costs force people to stay on in accommodation which is less than they really need. At the other end of the scale, high moving costs discourage older people rattling around in larger properties from downsizing. Sometimes a ‘correction’ can unlock a jam. That’s how markets work – one person’s problem is another person’s opportunity !