How bad will it get? - 28 October 2008

Posted by Paul Collins No comments

Every day seems to bring more and more bad news for the stock markets, financial institutions, and consequently, the property market in the UK. The global financial ‘readjustment’ that has been going on for the past few weeks has caused many to rethink what they will be spending their money on in the coming months, while others are genuinely fearful for their jobs – a situation they would not even have had to consider six months ago.

Property markets, like most others, are cyclical. The nature of the market means there is a significant human factor involved in the decision-making process. That leaves the whole structure of the market open to fashions, opinions, trends, and more than anything else at the moment, confidence. If buyers have confidence they will buy, if sellers have confidence they will hold out for the price they want, rather than throwing in the towel early for fear of putting off anyone who is remotely interested in buying their property.

That confidence feeds, for a large part, from the banking institutions who lend us the money for mortgages. If banks aren’t prepared to lend us money to buy property, not only are most of us unable to get the finance necessary to complete the purchase, but it doesn’t say much about how the banks feel about how the economy in general and the property market in particular are faring.

But are things really looking that bad for the property market? What are the prospects for the future? One of the biggest accusations I face as a property journalist is that we are responsible for some of the overheating in the market in recent times, with our constant optimism and encouragement to buyers to get into the market. Even recently there have been plenty of pieces in the press about this being a great time to buy. I’m not necessarily going to disagree with that assessment, but I for one know that the way in which we write about property here in the UK will have changed significantly by the time the current downturn is over.

The truth is that the outlook for property in the UK is good – or it could be very quickly if certain things happen. Although it can be argued that the current correction in UK house prices has been long overdue, and that we have been dealing in overvalued property for years, the situation in the UK differs greatly from the problems faced in the US, or even in Spain. Both of these countries embarked on building programmes on a massive scale in recent years – many of which continued even when the first signs of trouble in the property and financial markets were evident. The result has been a significant surplus of property in both these countries, with developers selling at huge discounts just to get stock moving – anecdotal tales suggest even 40 or 50 per cent discounts are available in some areas.

In the UK, it is generally acknowledged that there will be a huge shortfall in the provision of new housing in years to come. Despite the derision that the government’s plan for three million new homes in the UK by 2025 attracted, there were few who said we didn’t need the housing, just that the targets were unrealistic and unworkable. Even before prices started to drop and first-time buyers disappeared, developers were going to struggle to get anywhere near the amount of building done that the government said was needed.

Now, the big developers have laid off large parts of their labour workforce and mothballed new sites for development until market conditions improve. This means that when the financial markets begin to free up in the coming months, there is likely to be a shortfall in new property available on the market. Developers won’t immediately go out and start building again as soon as the market shows signs of improvement, and when they do feel confident enough to restart their building programmes, it will take time for the wheels to start turning again. In that interim period between the market upswing and developers being able to deliver new property onto the market, there is the possibility of sharp rises in the value of property across the country. Buyers will be keen to get in at what they see as the bottom of the market in order to preserve any capital gains they expect to get.

All of this sounds like good news for the markets, in that there may be the possibility of some relief from the downturn in the fortunes of the economy, but we must all hope that any upswing in property prices that comes from a shortage of supply is not a short-lived jump, and can be sustained through to more prosperous, and dare I say, financially-prudent, times.

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