I’m going to do something a little bit different today, because I’m going to dissect an article, which was published on the front page of a well-known tabloid newspaper a couple of weeks ago, because it’s all about the property market. It’s quite unusual for a national tabloid to devote the frontpage to a property article.
Now, it does happen sometimes. The Daily Express, for example, quite often has articles about the property market. While I say quite often, regularly is perhaps a better way of describing it. Once every 3 or 4 months, The Daily Express will often have an article about the property market. Generally speaking, depending upon what’s happening in the world and in the economy, it happens to be quite a positive article. Now, this is a different tabloid. I’m wondering, if I should name it. Okay, well, you’ve twisted my arm, it’s The Daily Mail. On August 16th, The Daily Mail rant a sort of a shock horror, “The Property Market Is About To Crash” type article on the frontpage. We’re going to look at that. We’re going to dissect it. We’re going to think, are there actually grains of truth in this, or is it just hyped? Because the interesting thing, is that, The Daily Mail is much less likely to write an article on the frontpage than The Daily Express.
So, I’m just wondering why they did that. The answer, is probably, because it was published on August 16th. If you think about that, that’s the height of the silly season. The silly season is when all the Politicians are away on holiday. Nobody is really arguing about Brexit. Donald Trump’s probably been a bit quiet, and hasn’t twitted very much recently. The journalists who aren’t on their summer holiday, who are left in an almost empty office to keep the show on the road, and to keep pumping out newsprint, are looking around for something to publish. What do they see?
Well, it was a report by the Office of National Statistics all about the property market. Very, very interesting. Because the thing which strikes me, is, it’s interesting, isn’t it, how we can take the same statistics, but give them a completely different spin, depending upon our mindset, and depending upon perhaps even our political leaning. Because all of the newspapers definitely have a different political leaning we know that. But it’s also evident when they talk about properties. So, for example, The Guardian, which is quite left leaning doesn’t like landlords. The Daily Express as I say, is usually quite positive and encouraging the property market. The Daily Mail in this particular instance, was quite negative.
So, let’s have a look at the article. This is on the front page. As I say, this is their prime real estate in terms of newsprint. So, they obviously want to make a bit of impact with this. It says, As Property Sales Fall Across The UK, Are House Prices Set To Take A Tumble? A big dramatic headline, is, the body of the copy. Fears are growing that Britain’s once red-hot property market has run out of steam. A string of indicators yesterday triggered warnings, that it could be heading for a correction, or even a crash. Oh, my word, gosh? Prices in London are falling at the fastest pace since the financial crisis! Really, okay. Well, we’ll certainly look at that. But the declines are not limited to the capital. Houses are also losing value across the North East as well as in towns and cities such as, Winchester, Oxford, Wycombe and Blackpool. Pockets of Devon, Derbyshire, Lincolnshire, Hertfordshire, Berkshire, Staffordshire, Cumbria and Surrey are also affected.
My word, I wished I’ve stayed in bed this morning. The number of property sales has also tumbled, by as much as 65 percent in some areas as buyers worried about rising interest rates baulk at the ‘silly money’ demanded by sellers. House prices have enjoyed almost a decade of strong growth since the financial crisis, but experts fear that this has left property overvalued. Estate agents said prices are now being cut to tempt buyers back in, particularly those worried about rising interest rates as they struggled to raise enough money to secure a mortgage.
Reuben Young, Director of Priced Out, which campaigns to make housing more affordable said, there can be no doubt that we are in a bubble. Okay, Reuben, there is no doubt. We’ll take your word for it. We might look at that a little bit closer though. People buy housing not just for security, but in expectation that prices will rise in the future. At some point, the bubble will burst. But in a warning to first time buyers hoping to take advantage of lower prices, he said that the fall seen so far does not mean it’s bursting now. It’s a very interesting point.
A report by the Office for National Statistics and Land Registry yesterday showed:
- Overall UK house prices rose by only 3 percent to £228,384 in the 12 months to June – the slowest increase since August 2013.
- London prices fell 0.07 percent, or by £3,400 to £476,752. I say that again, £476,752, the sharpest decline since September 2009, when the UK was in deep recession in the wake of the financial crisis. Interesting, £3,400 on a £500,000 property is the sharpest decline since 2009. Very interesting.
- Prices fell by 23.8 percent or £220,000 in the City of London. 13.9 percent or £187,000 in Kensington and Chelsea. 12.1 percent, or £132,000 in Westminster.
- Prices were also down year-on-year in the North East, by 0.6 percent, or £825 to £127,271.
- There are also falls of 5.3 percent in Purbeck in Dorset, and 4.9 percent in South Buckinghamshire. While home owners in Winchester, Wycombe, Stroud, Oxford and Blackpool saw declines of between 2 and 3 percent.
Experts warned that prices have risen too far in parts of the country, resulting in a dramatic collapse in a number of sales as buyers are put off by sky high asking prices. Many sellers face with demands to cut their prices have refused to do so, instead withdrawing their house from the market. Again, a very interesting point actually.
Across England, the number of transactions fell 19.3 percent between April last year and April this year. Sales were down 13.9 percent in Wales. A similar amount in Northern Ireland, and 9.4 percent in Scotland. But in parts of the UK, the falls were even more dramatic. In Newham, in London, they were down 65.6 percent. A shortage of supply has helped prop up prices in some areas as a large number of houses hunters chase unlimited number of properties. A crucial point. Experts warned that when sellers accepted the market has softened, and are willing to accept lower prices, a flurry of homes coming onto the market could push prices down further.
Howard Archer, and let’s face it, they always will borrow Howard out, didn’t they, to comment on everything. Howard Archer, Chief Economist to the Ernst and Young ITEM Club said, the downside for house prices is being limited by shortage of houses for sale. If a significant amount of supplies starts to come on to the market, you would expect to take away some of the support for prices. Lee Pendleton, Founder Director of Independence Estate Agents James Pendleton said people have been asking for silly money. Sellers need to be realistic. If a house is not selling, it is usually down to price. In South West London, where we operate, house prices rose 180 percent in 10 years. It’s insane!
Separate figures from the UK Finance revealed that there has been a sharp fall in the number of landlords buying properties. Let me just repeat that. Separate figures from the UK Finance revealed that there has been a sharp fall in the number of landlords buying properties. Some 5,400 buy-to-let mortgages were completed in June, down 19.4 percent on the same month last year. Both the Government and the Bank of England have launched clampdowns on landlords in recent years through higher taxes and tough lending rules. Paul Smith of Haart Estate Agents said, areas of the market are suffering. Government Policy on buy-to-let is clearly having a detrimental effect. But he added, the UK property market remains buoyant. Middle England is thriving.
So, that’s the end of the article. There we are, at the very last paragraph of this doom and gloom article actually, finishes on quite a positive note. It says the UK property market remains buoyant. Middle England is thriving. Now, contrast that with the headline, which is, Are We About To Have The Mother Of All Crashes? There we go. this is the press for you, isn’t it? It’s a very interesting article though.
So, it starts out suggesting the whole market is completely bombed, isn’t it, and that we’re heading for this horrible crash. But actually, there’s not a lot in there to support this. So, there’s interesting phrase like, Reuben suggests that we’re definitely in a bubble. He also, sort of, said that, as if that’s just taken for granted, taken as red, is a bubble. We’ll come back to that. But one of the things, which I thought was very interesting, which did come out through this article, is the fact that, there is a shortage of properties in the market at the moment, and that’s supporting prices.
This is one of the things, which we’ve seen since the credit crunch I think, that there’s been a scurrilous game of cat and mouse, between buyers and sellers. The reality seems to be that many people who would have sold house and moved perhaps, prior to 2007 have decided that they’re going to stay put, and they’re not going to move, and they’re going to improve the property therein. You’ll see, if you look at the figures for finance, for example, the number of re-mortgages has gone up, because people are re-mortgaging their homes to undertake, well, get finance their home alterations and improvements rather than selling properties, and taking out new mortgages to buy new properties. That seems to be the case.
Now, one of the things, which this article does highlight, is, the fall in values for the very, very top values stuff in London. It talks about properties in the City of London, and Westminster, and Kensington and Chelsea, where hundreds of thousands are being knocked off the price of a property. But the reality, is that, probably hundreds of thousands being knocked off properties which worth multiple millions. So, as a percentage of the asking price, it’s probably not a lot. I mean, it’s obviously to you and me, it’s a fair chunk of change, but in terms of the actual overall value of the property, it’s probably not telling us an awful lot. You’ll probably expect that, there are fairly niche markets with only a limited number of buyers. If there’s only a handful of properties sold in a month, that probably distorts the market. You could easily see that, if in an extra few properties were sold next month that could distort the market, in the way they could go up disproportionately. It’s a bit of a strange market. You certainly couldn’t put behind your hat on that, as being evidence of anything within the property market.
But what I think, is happening here, is that, as so often happens, I mean as I’ve said right at the beginning, The Daily Mail, they’ve got to sell papers. They’re trying to be a bit dramatic. But it’s a very London-centric view, isn’t it? Because, if you look at the property indices, which I would say, produce the best evidence, and if you’ve been to the Masterclass, you’ll know which one I’m talking about. I’m not going to talk about it now. Come to Masterclass. But there’s a particular index, which I love, because it’s one which is used by valuers and bank valuers. Interestingly, that came out today.
One of the reasons why I wanted to record this podcast today, is because I wanted to look at that index, to see what’s actually happening. Because it’s a monthly index, and it shows values across the whole of the country, but not regionally. It actually talks about specific towns. If you look at it, it’s quite clear what’s happening. London is taking a breather. But outside of London and the South East, probably the rest of the country is pushing on particularly, in the Midlands and the North. That’s classic of what happens with the ripple. If you understand the ripple, you’ll understand what I’m saying. Because ripple theory is this: London values go up, and then values ripple out from London, and the value of properties increases almost in a line coming out of London. Over time, that line moves across the country from North up to the north, and values increase in the wake of that. It’s a bit like literally, dropping a stone in a pond, and seeing it ripples out, or the stone would sort of drop on London and the ripples, the values ripple out of London, and they wake up. I’m sure you understand what I’m trying to say.
That’s what we’re seeing, because values in the North, values in the Midlands are still pushing on. I invest up in the North East so I’m particularly interested in what is happening in Newcastle. According to my favourite index, and this isn’t why it’s my favourite index, by the way, because I had to take bad news as well as the good news. But the good news, is, this month it’s reporting that values are not only going up in Newcastle, but they’re actually going up slightly faster than they were last month. So, we’re not seeing this sort of rush towards a crash. We’re seeing outside of London, things were actually doing pretty well. But I thought it would be interesting to contrast that article with the one produced by the RICS.
So, I have in front of me the July 2018 UK Residential Market Survey produced by the RICS, The Royal Institute of Chartered Surveyors, my eminent body of which I’m a member. If you want to find it, you can Google it. Just Google RICS UK Residential Market Survey. You’ll find not just the one for July, which is the latest one, but you’ll find back copies for previous months, which you can read, should you wish to. Anyway, the July one has a headline of “Landlord Instructions Fall As Rent Forecasts Edge Up”. So, let me just go through this. As I go through them, I’m just going to highlight some other points, because I thought it will be quite interesting to contrast this, which is kind of be like, with that one, it sounds naughty, but the professional viewpoint, which we can contrast with the sort of the media hype. So, this is what the RICS say..
They say, the most striking feature of the July 2018 RICS Residential Market Survey is the worsening trend in new instructions in the letting sector. This was something that was highlighted in the June Report on the basis of monthly non-seasonal adjusted data. However, a broadly similar pattern is visible in the preferred indicator. Whatever that means, it basically is saying, that the number of New Instructions in the letting sector is going down, less landlords. We’ll come to that. The results show that New Landlord instructions in the latest 3-month period has slipped to a net balance of -9 percent. This is the 9th consecutive quarter, in which this indicator has recorded a negative number, albeit only modestly on some occasions. This pattern is symptomatic of the shift in the mood music in the buy-to-le market in the wake of tax changes, which are still in the process of being implemented. Significantly, the drop in instructions is evident, in virtually all parts of the country to a greater or lesser extent.
So, what they’re saying, is, they’re saying basically the number of landlords bringing properties to the market has decreased quite significantly, since the Government start to bring in the tax changes. What tax changes? Well, it’s our old friend, Section 24, which is stopping us from offsetting mortgage interest against our rents when we’re calculating our income tax, if we own properties in our own name. Also, of course, stamp duty. Now, if you think back to The Daily Mail article talking about the big falls in the London prices in that little inner ring, at the most central part of London, which is Westminster, Kensington and Chelsea and the City of London. That’s where the changes in stamp duty is going to have the biggest effect, isn’t it? Because that’s where the highest value properties are. So, that’s no surprise. The RICS are confirming that, that and Section 24 are beginning to bite in the investment market and the buy-to-let market overall.
Let’s carry on with what the RICS have to say. While the implication of this feedback, is that, the supply of fresh rental stock of the market is increasingly constrained, the Tenant Demand indicator remains resilient. So, well, you’ve got an imbalance. The number of properties to rent out is diminishing, but we’ve still got a very strong demand from tenants. The upward momentum in the latter appeared to have slowed in recent quarters. But the numbers remain in positive territory at the headline level, +11 percent in the latest 3 months’ period. One consequence of this imbalance, is that, expectations for rental growth appear to be strengthening once again. Over the next 12 months, rents are projected to increase by a little short of 2 percent nationally. But the shortfall in supply pipeline is more visible over the medium term with a cumulative rise of around +15 percent expected by the middle of 2023. East Anglia and South West are viewed as likely to see the sharpest growth over the period. So, there we go.
So, in the short term, because of this imbalance between the number of properties coming onto the market, but with strong tenant demand, they’re expecting +2 percent, an increase in rent of +2 percent as an average across the country. But over the next 5 years, they’re expecting a 15 percent increase in rents. Now, here’s the thing. If rents are going to go up 15 percent, what’s that going to do for property values? Because the two can’t be in isolation, can they? It’s very hard to imagine it. So, all good stuff. If you’re thinking about, if is this the time to be in property? Well, maybe that’s suggesting, that now is the time to be in property. Very interesting that the RICS are highlighting that the Government measures to try and disincentivise buy-to-let investors. It’s clearly beginning to work. Let’s carry on.
Turning to the sales market, the underlying message is a little different from that reported in June. The headline price balance edged up from +3 percent to +4 percent in July, following two months when the results were very slightly negative. There we go. The Daily Mail, you haven’t mention that at all. The RICS is saying that actually far from being in a position, where prices and values are about to fall, they are actually edging up. They’re edging up more quickly. They’ve gone from +3, +4 percent. Okay, it’s not great shakes. But it’s certainly not indicative of an imminent crash, is it? It’s actually going the other way. Meanwhile, the Newly Agreed Sales net balance remained close to zero for the 4th month in succession. These results are consistent with a broadly stable housing market when viewed through the prism of the national perspective.
There we are. The RICS aren’t predicting a crash. These are the people who own the estate agencies. These are the people who are out doing valuations for mortgages. They’re saying that the market is actually broadly stable. That’s very interesting, I thought. As we’ve highlighted previously, the feedback to the RICS Survey continues to suggest a stronger market in Scotland, Northern Ireland, much of the North of England, the Midlands and Wales. There you are. That’s the ripple effect that I was talking about. Outside of London, things are doing pretty good. Thank you very much.
The London Price balance was little changed over the month at -40 percent. But it does represent a shift from the reading of -66 percent in April. Now, to better explain, that’s not saying that prices in London have gone down 40 percent. It’s just saying that 40 percent more surveyors expect to see a price fall than a price increase. But that’s less than we’re expecting a price decrease in April. So, if anything far from concurring with The Daily Mail, the RICS are actually saying things are coming back in London a little bit. So, there we go.
It’s perhaps no surprise that as speculation built ahead of the August Bank of England meeting, which was to see a quarter point rise in base rates, the headline New Buyer Enquiries series was a little changed over the month with a net balance of +2 percent. The New Instructions measures similarly signalled a flat picture of following 2 months in a row of very modest increases. We acknowledged last month, harbouring some doubts as to whether the pipeline of new supply into sales market would continue to improve in the light of the feedback received on appraisals being conducted by valuers. For the record, the appraisal balance in July, was once again firmly negative. As a result, our judgement is that the average inventory on the books of the estate agents, is likely, to remain close to historic lows. Let’s say that again. As a result, our judgement is that the average inventory on the books of the estate agents, is likely, to remain close to historic lows. The impact of this is visible, in both of the 12 months’ sales and the price expectations, while the former recorded a reading of -7 percent, is most negative number since October last year. The latter was much firmer at 25 percent.
So, what are they saying in all of that? Well, they are saying, despite the fact that The Daily Mail are telling us, that buyers are scared, because of interest rates. They’re saying that actually, the number of buyers went up slightly only by 2 percent. But this going is into positive territory, not negative territory. So, there’s slightly more buyers out there. But because the number of new properties in the market hasn’t increased, they’re expecting that prices are going to increase. The net balance of the price expectation graph is +25 percent. More surveyors expect prices to go up than there are surveyors expecting prices to go down, in other words. The RICS, putting it crudely, are expecting prices to go up, because there’s slightly more buyers, and there’s no extra sellers. We continue.
Each quarter an additional question is inserted into the survey in an attempt to capture the trend in the gap between asking and sale price. The latest set of results tell a broadly similar story to that seen in April, and generally, reflects of regional skew in the performance of the housing market. So, for properties put on the market at a price in excess of £1 million, roughly one in 10 are sold at a discount of more than 10 percent. Okay, that’s what The Daily Mail are saying. Those are really high value properties in London, taken a bit of a hit. The RICS are saying that properties, which worth more than £1 million, expect to have to discount the price by 10 percent to get them sold. Actually, that’s not an unusual thing, because there are far fewer buyers at that level. But obviously, one of the things, which we’re struggling with, is, with this whole stamp duty, in which we’ve already alluded to.
In addition, around 3-quarters of survey participants cite there being some negative gap between the initial asking and an eventual sale price. For properties put on the market between £0.5 million and £1 million, the comparable numbers show only 2 percent of respondents seeing prices achieved coming in more than 10 percent below asking although a still sizeable 62 percent contributors report sales prices coming in below the initial asking price to some degree.
So, basically, what they’re saying, is, they’re saying that between £0.5 million and £1 million, you’re going to have to discount a little bit, but not nearly as much as for the properties over £1 million. You’re going to have to knock a little bit off, but it’s not going to be the 10 percent that you’re going to have to knock off, if you’ve got a property of more than £1 million.
Meanwhile, and this is probably, most of us are going to be interested in. Meanwhile, for the mainstream market, which is, homes priced under £0.5 million, the largest share of respondents noted asking and sales prices being at the same level. The same level! Significantly, the feedback in this area of the market actually shows one in 5 properties with a completion price, above the asking price.
So, there you are. Daily Mail, certainly no evidence of a crash in that. So, what are they saying? Well, if we sort of pick out some of the main headlines from that article, they’re saying it’s a relatively stable market. It’s doing better in the Midlands, and the North, and Wales, and Scotland than it is in London. If the properties are below £1 million, you’re probably not going to have to discount them, because there are more buyers. There has been no increase in the number of sellers, which means that it’s kind of a sellers’ market in a way although the buyers may disagree with that, because we’re told there’s not that many buyers. But there’s enough buyers for there to be a slight imbalance, which means, that prices are stable, and that below £1 million, you probably don’t have to discount. You may even be able to get more than the asking price.
So, there we are. That’s what the professionals think. I thought it’s very interesting just to contrast that with the article in The Daily Mail. If anything, it just proves that you need to know what you’re talking, and get your own information. Do your own interpretation. Don’t let The Daily Mail, or the press, or anybody else interpret the data for you. Don’t let me interpret it for you. You get your own data. You come to your own conclusions. But certainly, don’t just read the headline, and think, ah, that must be true. Because when you start digging into it, there’s an awful lot going on, which isn’t reported, and which isn’t said unless you go to the right sources and information.
So, I recommend that you perhaps, get a hold of the RICS Residential Market Survey every month, just to keep an eye on what they’re saying. Because, whether you agree with them or not, what they’re saying is going to be clouding the judgement, or influencing the judgement of valuers who are going out to value your properties, if you’re applying for mortgages. If you’re wondering why you’re being down valued, you’ll find it in here. If you’re wondering whether you’re going to get a more positive valuation, you’ll find it in here. So, it’s always good to see what they’re thinking.
By the age of 35 he was a Salaried Partner in a well respected firm of Chartered Surveyors, and was managing partner of their West End of London Office. His specialty was commercial property but during the recession of the 1990’s his specialisation became redundant, and so did he.
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