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02 December 2023

Road to recovery is long, uncertain

By Graham Norwood

Housing in the UK is affordable again. And that is more or less official. Over the past 15 months, Savills, the real estate consultancy, has called the UK market more accurately than any other industry player or economic observer bar none – including the London government. In early 2008, before we knew how drastic a fall in prices and turnover we would encounter, Savills told us what would happen.

It said a 25 per cent peak-to-trough price fall was likely, and that has now come true. By the firm's calculations, that means UK house prices – measured by the ratio of property value to household income, and at one time out of reach of all but the wealthiest – are on paper now almost universally accessible except to the very poorest. Household disposable income, after mortgage payments have been deducted, is today "almost at an all-time high" according to Savills' research guru Yolande Barnes.
The threat of further price falls is beginning to recede and investors are beginning to sniff around the market for bargain-basement priced properties. International buyers are flying to the UK in droves; indeed, thanks to the combination of falling house prices and sterling sliding, anyone buying a UK home using Japanese yen will pay 45 per cent of the amount they would have paid in autumn 2007, when UK priced peaked.

There are even lots of enquiries being made by potential buyers, large numbers of hits on residential sales websites, and one index showed a small price bounce after a year of falls.

Sounds like the road to recovery, doesn't it? Think again.

For, there is a further problem, and one that even Savills did not forsee. That is the depth and likely duration of the wider economic recession and the stubborn inability (or refusal) of the banks to lend money. The effect is that while homes are notionally more affordable, in practice the majority of those who wish to buy still cannot do so or are too worried about their broader economic wellbeing to risk doing so.

Another Savills researcher, Lucian Cook, uses Churchillian terms to say "it's the beginning of the end of falling prices" but emphasises there will be no pick up in transactions and we will rattle along the bottom of the market cycle for some years.

"We're seeing economic forecasts fall by the day, no one really knows for sure what is happening, and we're unlikely to be able to make a sensible prediction about when the market will begin recovering until lending is eased," says Cook.

With official jobless figures now hovering around two million-mark and new redundancies announced every day, there is a blanket of pessimism descending over British consumers. It is foolish to think that such pessimism will not extend to their views of the housing market, even if prices have fallen to affordable levels.

In other words, the confidence that should be returning to would-be buyers and sellers today is in short supply because of (a) the credit squeeze and (b) the wider economic malaise. Neither of those problems looks like ending anytime soon.

Under pressure, he admits that Savills' forecasts delivered a year ago – saying parts of the UK would not recover until 2011 to 2016 – may now "have to be pushed out a further 12 months or so" although one senses we could be talking longer than that.

Being a forecaster at the moment is extraordinarily difficult and Savills deserves ongoing praise for not only attempting to explain the trends in the UK residential market but also for being so honest with its clients, investors and the public.

But the news that the firm imparts is unsettling. It is news that should make the entire property industry question whether there will be a genuine "return to normal" or whether we need to recalibrate our expectations.

When transactions rise again, in a few years time, there is no longer a guarantee that they will return to 2007 levels – not just immediately, but ever.

Over the past 15 years in the UK, most people have not known anyone to lose money on homes; as a result, everyone has wanted to get on the housing ladder. Now, we all know someone in negative equity or with a buy to let property that isn't profitable or who has invested badly in a get-rich-quick housing scheme that is little more than a scam. Perhaps in the future not everyone will want to get on that ladder. These are exciting and unknown times. And the biggest unknown of all, as Savills admits, is how long they will last.

- Graham Norwood is a property correspondent for The Observer