13 December 2018
Home buying
Christmas early or cancelled?
By Frank O’Nomics
House price falls are being hidden.
What a treat! Had I been singled out as a potential buyer who needed a little encouragement? Whatever the reason, it seemed remarkably generous of a house builder to offer to pay the stamp duty on a potential purchase. I wasn’t even aware that I was in the market for a new home, but this looked like an offer to seriously consider – at least for a nanosecond. That was how long it took to realise that the offer was born out of desperation and is further evidence of the perilous state of the UK housing market –well in London at least. What I was really being told is that the sticker price of most housing currently up for sale masks the true level of the market. Evidence suggests that the clearing price for flats and houses is much, much lower than most websites would suggest.
How can this be the case? Well it seems that there are 2 main reasons – exceptionally low turnover and hidden price falls. Consider the first the next time you wander down the High Street. This may be a typically quiet period but my own survey witnessed very few estate agents helping clients either in person or on the phone. Statistical evidence bears this out. RICS data shows London sales at a record low with the average estate agent shifting just 8 homes a quarter, and annualized sales to the end of October at their lowest since records began in 1994. Sales of recently completed homes are down 25% this year, creating a very difficult environment for house builders and developers. Such low levels of turnover make it much harder to assess what the right value of a property is. If little is changing hands traditional valuation techniques become sketchy at best, and ultimately something is only worth what people are prepared to pay.
This brings us to the hidden sales aspect. Through the heady heights of the housing boom, those desperate to get involved were aggressively buying new properties “off plan”. Reserving a property in a rising market is one thing, finding the balance to pay in a falling market is another. Rather than do so, many are choosing to take a loss (sometimes as much as 25%) rather than take possession, with one broker claiming to be selling on at least 15 of these contracts each month. The problem is that official data only records the original price, rather than the pre-completion sale. At some stage of course the market has to catch up with the reality of the change in clearing price. This may take some time due to many new build properties having more inflated prices driven by the attractions of the Help to Buy scheme, but the developers are likely to be prepared to pare back a generous profit margin if it means shifting their stock.
There are two additional indicators of a market in trouble – businesses pulling out and the use of discounts and incentives. The unsolicited stamp duty payment offer I received (worth £34750 by the way) is not unusual and it does, of course, protect the recorded sale price on which other sales may depend – yet again artificially maintaining an above market level. Beyond offering to pay the stamp duty (a discount in all but name) many developers having been openly offering discounts, including getting involved in Black Friday. Typically these discounts are much greater than the stamp duty with Galliard knocking as much as 11% off the 12 new build properties listed in this week’s Evening Standard. The situation in London is having an impact on the behaviour of both agents and developers. Foxtons has closed 6 branches in the second half of this year (including Park Lane) after seeing a 6% fall in revenues. A newer hybrid agent Emoove, which raised £2.62m in 2015 via crowdfunding and a further £1m this summer, went into administration this month – not great for the shareholders and also the 4,000 vendors who paid the £895 upfront fee. As for house builders, Countrywide Properties and Berkeley Group have shifted their focus away from London, while Crest Nicholson has gone so far as to close its London division.
This all poses the big question: Is this just a healthy dose of reality for London, or the beginnings of a national malaise? With new-home sales in London reportedly down 25% this year it does certainly seem a concentrated phenomenon for now. It is not unreasonable to suggest that London had this coming. With property prices running around 15 times earnings in London, but less than 8 times in somewhere like Birmingham, it is not surprising that builders are seeing potential sales as more likely outside of the capital. This rationale is supported by the fact that the price of many non-London properties will fall below stamp duty thresholds that have been a key factor in the slowdown.
Nevertheless, those living outside of London should be wary of schadenfreude. Rightmove report a 1.7% fall in prices nationally in November alone. Much of this is accounted for by falls in London and the South East, but the average property now takes 61 days to sell compared to 42-47 days earlier this year. Of the properties listed on Zoopla, 38% have been marked down in price (47% in Brighton). Whether the property market has turned or we are just seeing the reverse of the “ripple effect”, when rising prices in London previously spread to the rest of the country, remains to be seen. For now, those tempted by the offers of a seasonal discount should remember that property is for life – not just for Christmas.
