If you want to see a clear case of a housing market correction being whipped up into a crisis through sheer lack of confidence, then look at what is happening in the United Kingdom.
Now, there is no doubt that the American banking crisis is causing problems in the UK and that there is a genuine risk that the sub-prime calamities in the United States could spread across the Atlantic. But loose talk has raised the risk factor in the UK housing market to a much higher level than required.
The facts of the matter are simple.
The UK has enjoyed a 10-year bull run on house prices, which have now become unaffordable for many young, first-time buyers. As a result, prices are falling back in some places, leading the UK to fragment into a series of ‘sub-markets’ according to their price and geography.
For example, in the first quarter of the year house prices in the UK’s industrial heartland, the West Midlands, fell by five per cent; prices in the East Midlands, a generally more rural area, increased by 2.2 per cent. Prices in two other semi-industrial areas, the North East and North West, fell by 0.5 per cent; in Greater London, they rose by 1.6 per cent.
The UK has also fragmented into price markets. The volume market, for £200,000 (Dh1.5 million) homes or below, has suffered a large drop in transactions – down about 25 per cent in the first quarter of the year. This is not surprising, as 85 per cent of these purchases rely on mortgages, which are now hard to come by and more expensive, too. But the top end of the market – say, £500,000 and above – is still doing relatively well, because fewer than 50 per cent of these purchases rely on mortgages.
What is more, the context for the current price volatility is very different from the last UK housing market crash in the early 1990s. Back then, unemployment was more than 1.4 million and rising; today it is 1.1m and falling. Back then, the Bank of England base rate was over 10 per cent; today it is five per cent. Back then, the British economy was contracting; today, despite the global slowdown, it is still growing.
On top of all that, the UK does not have the size or liabilities of ‘sub-prime’ lending that has caused so much trouble in the US. And the UK housing industry has not built anything like the number of homes, making a long-term shortage of supply inevitable.
So the current UK house market presents a mixed picture, you might say. There are major problems but not necessarily producing a crash, right? That’s what I think too.
Now in a ‘usual’ period the housing market would correct itself. Prices of homes that were simply too expensive (as in London) or prices of properties where there is an over-supply (as in some big city centres) would drop, and life would return to normal.
But we are not in a normal period. Instead, housing market problems are happening at the same time as mortgage lenders are withdrawing products, raising the cost of borrowing, and in some cases trying to pull out of the market. So now, more than ever, there is a need for precise explanation to ensure that what should be seen as a simple stalling of the market does not become a tailspin with buyers and sellers beginning to panic.
Yet tabloid headlines and sloppy language by people who should know better, risk causing exactly that tailspin.
That lack of confidence may well lead to precisely the crash that the doom-mongers want – but which, so far at least, the facts suggest should be unlikely.
For example, a much-criticised ‘club’ of UK estate agents called the Royal Institution of Chartered Surveyors has just produced a report saying the housing market is at its most critical for some 30 years. Its evidence for this does not include one single price of a property, nor any analysis of trends from the six indices that monitor UK homes sales on a monthly and quarterly basis. Instead, it merely talks to its own members and produces a report based entirely on what it calls ‘surveyor sentiment’.
The problem with surveyors sounding gloomy is that, not unreasonably, the media see the report and – despite its lack of statistical rigour – uses it to set the agenda for the growing public debate about the housing market. The public read, listen to and watch the media, and they get gloomy too.
The result? Fewer people move, fewer people pay asking prices, and fewer people invest in property.
In other words, we get a genuinely depressed housing market caused not by real problems but by a lack of confidence. And, perhaps, it could have been avoided.
Despite the London rumour mill going into pessimistic overdrive – stories of 40,000 City of London jobs being lost and house prices falling fill the air, not always with facts to back them up – the property market has hit at least one new high.
Details of the most expensive property deal ever in the UK, on the site of the old Chelsea Barracks, have just been revealed. The £1 billion deal is on a 12.8 acre site bought by the Qatari government and brothers Nick and Christian Candy, two of Britain’s most charismatic property design gurus.
At £75m an acre it dwarfs the £150m in total paid for the brothers’ other scheme known as One Hyde Park, located opposite the Harrods store. The Chelsea Barracks project will be designed by celebrity architect – and some say, over-used architect – Lord Rodgers. It features 638 homes, a hotel, restaurants, a spa, shops, a sports centre and public and private gardens, including 300 trees.
The Candy brothers, reported to be worth £9bn, predict the homes will be bought by some of the world’s wealthiest people. As their most recent scheme hit £5,000 per square foot before the credit crunch came to the UK, and as they design the interiors of super-yachts for clients in their spare time, that’s hardly a wild prediction.
But there is a serious point to this array of glamour and high prices. It means that, crunch or no crunch, London is still a serious market for serious real estate investors.
Crisis? What crisis?
- Graham Norwood is property correspondent for The Observer
Time to pay the price for loose talk?