PlayBeat the property slump
Published: Monday, 16 June 2008, 12:53PM
The Survey
ITV1’s Tonight programme has commissioned an exclusive survey to give us a real sense of what is going on in the property market. It is the most independent authoritative forecast since the credit crunch began. We asked the Society of Business Economists - the leading organisation representing business economists in the UK - to survey their members on what they thought would happen to the housing market over the next few years. 225 of the best informed minds in the country replied.
The SBE’s Bronwyn Curtis tells us about the contributors:
‘Often they are economic consultancies, professional organisations. They are banks, they are building societies. The thing about this survey is that it was completely anonymous, and so they were able to give their own views, rather than that of the institution they worked for. I think that’s important.
‘It helps us put the economy, the consumer and house prices into perspective. Houses are people’s biggest assets, and people in the street are always interested in prices because it’s important to them. ‘
‘The extremes are ironed out and we get to see what people really think is going to happen to housing. ‘
The findings
Bronwyn tells us: ‘The lesson from this survey really is that don’t expect this fall in house prices to be over any time soon. The pattern that we can take from this is that house prices have further to fall. They may bottom next year or the year after, but they may not rise for quite a long time.’
Bronwyn adds that those people who brought their houses late in the cycle could have to wait ‘a long time’ before they get their money back.
1/ Are you surprised at how much house prices have fallen since 1st January 2008.
Yes 5%
No 94%
Bronwyn says: ‘It’s often easy in retrospect to be very knowledgeable, but I think in this case it was fairly clear that we were going to get a big knock on effect this year. We saw the peak in the middle of last year; we saw the credit crisis come; we saw the lenders in this market have problems, so it’s not surprising that that intensified going into this year.’
2/ What will happen to average UK house prices in 2008 compared to 2007?
Fall by more than 10% 24%
Fall by 6-10 % 53%
Fall by 1-5% 22%
Remain stable 8%
Bronwyn says ‘It’s very gloomy that economists see house prices falling further. The majority consensus of where we’ll see average 2008 prices compared to 2007 is that they will fall by 6-10%. We only had one respondent who thought that house prices would be going up, so it was overwhelmingly that they were going to fall further.’
3/ When will UK house prices bottom?
2008 7%
2009 44%
2010 38%
2011 8%
2012 2%
Bronwyn says: ‘Over 80% said that prices would bottom in 2009 or 2010. That’s quite interesting. It does look like house prices are going down further if the economists are right. It takes quite a long time for the consequences of the credit crunch to feed into the economy, and on top of that consumer’s real incomes are decreasing all the time because of oil and food prices. The worst is not over.’
4/ How far will UK house prices fall from the 2007 peak before they bottom?
1-10% 18%
11-20% 56%
21-30% 20%
More than 30% 4%
Bronwyn says: ‘We have quite a wide range of results here, but most are in the 11-20% range. Most people are thinking of a fall because if you look at what’s happening in the UK economy generally, it’s not looking good. Most economists have been revising down their growth forecasts; on top of that people have been looking to what’s been happening in the US sub prime market. It’s not the same in the UK – it’s not as bad as that. We’re seeing the hit coming and the question is just how big will that hit be? People will feel poorer and when they feel poorer they don’t spend as much, and so it can be a downward spiral.’
5/ When will UK House prices rise above the 2007 peak
2008 1%
2009 6%
2010 11%
2011 18%
2012 26%
2013 8%
2014 10%
2015 14%
2016 1%
2020 3%
Bronwyn says: ‘People seemed to have a good idea about when house prices would bottom, but in terms of when it goes up again, there was a really wide range of views. I think it’s quite difficult at the moment to see what will happen to the UK economy over the next few years. It doesn’t look like we’re going to see a fall, which is what we’re in the middle of, and a quick bounce back. It does look as though it’s going to go on, and we’ll have slow growth for some time. On top of that, house prices were overvalued, according to most economists, and so you have the situation where they remain undervalued for a long time.’
6/ Rank your reasons why house prices have fallen
1) Tightening in credit conditions
2) Excessive valuation
3) Heightened uncertainty among consumers about economic prospects
4) Reduced expectations of capital growth
Other
‘The results show that there are a whole range of reasons, on top of the options given in the questionnaire. A lot of them related to perhaps excessive valuation of other asset prices, not just housing, a slow-down in the UK economy, in the global economy and, excessive media attention. One thing that was quite interesting was pointed out by several people was we had a slight improvement in the housing supply situation. You think of, you know, there’s always a shortage of housing, but it has improved a bit. So I think what you’ve seen is the perfect storm. A number of things all happening at once and then of course intensified by the global credit crunch.’
However, it is a survey. It is people’s views on what’s happening, and they can change quite rapidly. For example, I don’t think anyone expected inflation in the UK to rise quite so quickly this year. As we know forecasting is not an exact science.
Find out more about the Society of Business Economists:
www.sbe.co.uk
Gary’s 6 Golden Rules
On hand to offer advice is property guru Gary McCausland. A millionaire, he is the presenter of Channel Five’s How to be a Property Developer. He owns a hugely successful property company based in London that specialises in residential and commercial property development, investment & sales. Here are Gary’s tips for would be developers.
1/ Buy at the right price
Gary says: ‘First of all you have got to buy at the right price. Price is everything. You have got to find a motivated seller, and you have got to buy it cheap. You must buy for twenty percent less than you can sell it for. I know that sounds difficult, but the more motivated the seller, the more chance you have of getting a bargain.
2/ Location
Gary says: ‘It’s very important to pick somewhere not in the up area, but in the up and coming area, and a good thing to look for is skips on the street because that shows that people are investing in that area, that they’re doing up those houses, that money has been spent in a certain location. You’re looking for places near to new tubes opening, train stations, supermarkets, public transport, schools - all those things go to make a great location and that’s very important.
3/ Economic picture
Gary says: You want to keep an eye on interest rates, inflation, employment; that’s the sea that holds up the whole property market. So that is very important to what the long term economic outlook for property is.
4/ Knowing your market
Gary says: ‘You need to know who you’re likely to be selling to. Is it going to be students? Is it going to be professional couples? You need to understand who is going to buy or rent your property, so importantly you get the specification right – that is crucial.
5/ Adding Value
Gary says: ‘You always want to add value, whether it’s going into the loft, putting on a conservatory, going into the basement, changing use with planning permission, refurbing. You always say you buy the worst house in the best street and then you make it the best house. That’s the way you maximise value.
6/ Timing
Gary says ‘And then finally timing is crucial - it’s really important to get in and out quickly because in property with interest, time literally is money. Even if you’re planning to rent, you want to get refurbed quickly and get tenants in as soon as possible.
Find out more about Gary
www.garymccausland.com
Rights to Reply
Natwest and Halifax
Two of Britain’s biggest Mortgage lenders predicted late last year, that House Prices would not fall 2008. How wrong they were. Although both the Halifax and Nationwide and have subsequently updated their forecasts, Mark wanted to establish their motivation, if any.
Nationwide’s chief economist, Fionnuala Earley told us: “We have to report what we see what the market is doing and how we think the market is going to behave. There’s no vested interest in us to not tell the truth. when we put our forecasts out we talked about broadly stable; we thought at that time the risks were largely balanced around zero, but what’s happened is that the market weakness has come through because the credit crunch issues have been much more severe than we anticipated at the time and they’ve been much more long lived.
“In our forecast back in November, we said that prices this year would be around the same level as they were at the end of 2007, but at that time we did identify that there were lots of risks around that.
“We always talk about price growth within a range where we can and that’s what we did. Absolutely, I would take offence at any claim that we were talking up the market. I would take a professional offence at that and I certainly wouldn’t be a competent spokesperson for Nationwide if I was to do that.”
Martin Ellis, Halifax’s Chief Economist, explained "Forecasting house prices is an imprecise science. Sentiment is a key driver of house price movements but sentiment is very difficult to predict and can change rapidly and substantially. This has indeed been the case in recent months and has been a major factor behind the fall in prices in recent months. The financial markets crisis has also been more severe than we had expected when we made our original forecast. This too has had a negative effect on sentiment as well as restricting credit availability more severely than we had envisaged. As a result, the downward pressures on demand, and hence house prices, have been more significant than predicted six months' ago.
"The decline in house prices is caused by the difficulties created for potential house purchasers by the rapid rise in house prices in the last few years, a squeeze on spending power and the reduction in credit availability. These factors have curbed housing demand.
"High employment levels, low interest rates and a shortage of new homes support housing valuations. Price falls should be measured against the significant gains in recent years. The average UK house price rose by more than £88,000, or 79%, between August 2002 and August 2007. "
www.halifax.co.uk
Channel 4 and NatWest
The onslaught of property programmes on TV helped to inspire Mark to develop a property. Indeed there have been 32 different property formats on terrestrial TV in the past year and a half. One of Britain’s foremost media academics, Professor Greg Philo, says that television has played a role in ‘quite a scandalous overselling of the property market’.
He believes that whilst cheap credit and high employment started the boom, the spate of TV programmes in its wake created what he calls a “social panic” where people felt they had to buy property whatever their circumstances. And as so many programmes are repeated, which therefore cite market information which is no longer current, he is especially concerned that television has allowed some programmes to be sponsored by companies which could profit from a false impression.
As Channel Four broadcasts half of all the property programmes on terrestrial TV we asked them for a response. We also approached NatWest, who sponsor 4homes.
Channel 4 statement
“Channel 4’s property series aim both to entertain viewers and to provide important general information to those who have made a decision to buy property by providing a balanced and realistic view, including the difficulties involved.
“New series now in production will of course reflect the new conditions that currently prevail in the market. Where a programme is repeated, or revisited, we show the original recording date.
“All TV sponsorship is subject to regulation by Ofcom and Channel 4’s programme sponsors have no involvement in editorial policy or decision making. “
In later correspondence, Channel 4 said “To clarify, revisits have always had the original record dates astoned on screen. Repeats of older programmes (carried primarily on More 4) now clearly caption the original record date in aston form.” www.channel4.com/4homes
Natwest Statement
“We disagree with Professor Philo's assumptions. NatWest is a responsible lender and takes its responsibilities in the mortgage market very seriously.
“All our mortgage applications have to satisfy very strict affordability criteria and credit scoring checks before being approved, and we do not lend to people who cannot afford to repay. As a key mortgage and home insurance provider, it makes perfect sense for NatWest to look to sponsor property programmes and we do not see any conflict of interest in such an approach.”
www.natwest.com