Housing demand unlikely to drop

There is a feeling of something like powerlessness in the United Kingdom property markets right now – a sense that, whatever governments or institutions do, we just have to wait for the recession to end.

Real estate will then recover, as the wider economy does.

I will let you decide whether this view is one of complacency or reality, but either way it does appear that markets have a power all of their own, which fiscal measures like those announced by the UK Government this week can do little to alter significantly.

Look, for example, at real estate's capacity to generate wealth. In the UK this is down primarily to one fact – there is much lower supply than there is demand.

As a result, even with the recent residential market slump, figures show that house prices have risen overwhelmingly over the past decade.

New data for the south west of England – that coastal peninsula about 482 kilometres to the west of London – demonstrates the point I want to make.

In the past year many areas within the south west region have seen price falls of six per cent to 19 per cent, according to the Nationwide house price index, one of the leading measures of residential capital appreciation in the UK. Yet, even taking such dramatic falls into account, every part of the south west has shown dramatic growth in the past decade.

From the start of 1999 to the start of 2009, house price growth in that region ranged from 127 per cent to 180 per cent – so even the least affected areas more than doubled their value, while the most affected saw prices almost triple. Now there are wide factors at play here, of course.

The south west of England has seen a higher-than-average growth in broadband connections, allowing people with London-sized salaries to work part-time or even full-time in an area that previously had far lower typical incomes. The region has also seen a dramatic growth in the number of holiday homes, again owned by Londoners or other big-city types; in a few pockets, as much as 40 per cent of the housing stock consists of holiday homes. The result is that demand for properties in general has risen because outsiders, as well as locals, want to buy and this means prices have risen as well. The recession, ironically, may have led to dramatic price falls over the past 12 months – as much as 25 per cent in some places in the south west – but while this has taken the edge off the 10-year appreciation figures, it is merely sowing the seeds of more capital growth in future. That is because the fall in prices has deterred house builders, who have constructed fewer homes, making the disparity between supply and demand even greater than before.

Look at the building rates for new homes. In the three counties that make up the far south west (Cornwall, Devon and Somerset) back in 2005 there were 5,768 new homes constructed; in 2008, with the credit crunch and recession in full swing, that number had fallen to 4,500. Expect a still lower figure in 2009 and then, even if the market bounces back, there will be only a slow recovery in house building figures because it takes time to find plots, win consent to build and recruit labour.

This problem is not unique to the south west. You could substitute any other region of the UK and while the figures may be slightly different, the story would be essentially the same – the market is slow and the supply inadequate, yet demand is unlikely to fall in the long term.

Little wonder, then, that government interventions such as altering stamp duty thresholds or accelerating the funding of semi-public bodies such as housing associations to bulk buy unsold private stock appear to be little more than window .

It will take far more dramatic intervention – wholesale scrapping of stamp duty, perhaps, or widespread public building programmes to create new homes – to have any tangible, lasting effect on the supply and demand issue. Against that context, the market seems almost to be playing with us. Prices have dropped a lot in 12 months but have risen over a decade; construction rates have dropped in 2008 yet we need so many new homes; mortgage provision is down, yet we have more households being created that want to buy their own homes.

So is this a counsel of despair? No not at all. I see it this way – if we really wanted to do something, we would intervene much more heavily. As it is, we seem to want the market to right itself and given time, it will do so.

As the United Kingdom approaches the second anniversary of house price falls, the question is: how much longer will it take?



- Graham Norwood is a property correspondent of The Observer