Mortgage costs are rising, sales volumes have collapsed, and house prices are on the way down. Yet even in the face of these steadily deteriorating fundamentals, estate agents, mortgage lenders, industry insiders and much of the press continue to claim that all is well in the property market. For estate agents in particular, all news is good news as far their predictions about the market are concerned. Rarely do you get to hear that any segment of the housing market is weak, at least not until after the event, when they’re often happy to report that the market is now better than before.
These upwards-only commentators famously led us into the 1990-1994 housing crash by telling us not to worry, all was well. And today, most agents and agency bodies are forecasting solid house-price growth forever. My bet? They’ll continue to do so until well into the downturn.
Overvaluations
Most recently, the estate agents’ game has been to talk about “realistic” pricing, but then to compete by offering wildly optimistic valuations. Ian Balfour, an agent at Coombe Residential in Wimbledon, for example, is quoted in the London Property News explaining this tactic. “Agents are giving false hope by overvaluing to get the instruction, because a property just won’t sell. With so many websites [buyers] can see what properties have actually sold for, not what they were on at.” (See below.)
These websites also make it harder for agents to talk up a sale, for example at a new development, by playing fast and loose with the truth about prices paid on previous stages, and this is already having a dramatic effect in the new-home market.
According to the website Smartnewhomes.com, the average price of a new home in greater London has dropped more than 10%. Even so, David Bexon, chief executive of Smartnewhomes.com, reckons “prices are likely to start increasing again in the near future”, according to Graham Norwood in London Property News.
“A definite feeling”
Bexon proffers no evidence to support this assertion, but he does report “a definite feeling that the housing market has been through its worst”. Bizarrely, Bexon is able to assert that “consumer confidence has been boosted by the recent dip in prices, as many buyers feel they are now getting a more competitive deal on their home.” This is even though confidence is reportedly “still” high, and must therefore have remained so during the recent 10% drop in prices. Somehow, Bexon believes, “it is just a matter of time before this confidence is translated back into price increases, throughout 2005”.
Coombe Residential’s Ian Balfour is being disingenuous when he asserts that agents who overvalue “are just shooting themselves in the foot”. In fact, such agents have a very clear strategy in mind. Once a vendor is bound by a signed agreement, the agent has plenty of time to persuade them to lower the price to a more “realistic” level. Peter Bolton-King, of the National Association of Estate Agents (NAEA), is quoted in The Daily Telegraph as saying that “valuing a property is not a fine art, but a difference of 25% (between valuations) would be ludicrous”. However, a new survey by Which? found that in nearly half of all the properties they had appraised, the top valuation was at least 25% higher than the lowest. Ludicrous!
The truth: a market in trouble
The truth of the matter is that, optimistic overvaluations aside, the market clearing price is clearly in decline. As Balfour says, vendors “have to catch up with what is happening, it takes a while for this to filter through, partly due to wishful thinking”. Amy Smith, sales director for Chesterton’s Barnes office, agrees. “In 2004 we had many vendors refusing to take offers,” Smith told the London Property News, “as they were coming in lower than they believe they would have received within the previous six months.”
As a consequence, transaction volumes have slumped. Peter Wright, a partner at Moody & Co, told The Daily Telegraph: “Properties just aren’t selling [and] sales are down by more than 30%.” Meanwhile, Balfour admits, “we have the most [unsold properties] we have had on the books for the last two years”. However, if the situation is poor for houses, it’s diabolical for new flats. Smartnewhomes.com reveals that new apartments now comprise “55% of all new homes for sale, compared to just 33% in mid-2004, its highestlevel ever”.
The collapse in transaction volumes, as more buyers decide to sit and wait for prices to come down to their level, caused mortgage approvals in March to drop by a third year-on-year, according to the British Bankers Association (BBA). The BBA were keen to point out that the March figure was a massive 38% increase on February’s number. But that doesn’t make these numbers less catastrophic: February is always weaker than March, for seasonal reasons (it has fewer days). Even so, The Daily Telegraph’s take on the March numbers was “that after months of falling house prices, property values may increase at a steady pace in the second half of the year”.
So it’s not just estate agents and the BBA who can only see through rose-coloured glasses. As sellers come down to meet buyers’ prices, house prices will fall. The last three downcycles saw real price drops disguised by high inflation. With inflation still relatively low (if rising), house price falls will have to be experienced nominally and so this could be the biggest crash of all. Yet instead of assessing the risks properly, the agents, the lenders, and even the press, continue to pretend all is well. It isn’t.
Buy-to-let? You’d have been better off with a tracker fund…
Buy-to-let has become something of a passion for UK investors. The property boom of the last decade has made much of the common belief that anyone can be a property millionaire – so people have been diving into the market in droves. The number of buy-to-let mortgages taken out in Britain soared from a mere 28,700 in 1998 to 526,200 in 2004, according to the Council of Mortgage Lenders. But is getting in on the game still a good idea? Probably not. We can’t count on house prices rising any more, which means that investors can’t plan on making the easy capital gains of a few years ago. Worse, interest rates have risen significantly in the last two years and rental yields have fallen as amateur landlords have flooded the market with properties.
Today, many investors are finding that, far from making them rich, their buy-to-lets are costing them dear in cash terms. Speculative booms tend to end in grief, and right now this one looks like it will be no exception.
Still, it’s very easy to fall for the buy-to-let fans’ sales patter, saysRoss Clark in The Daily Telegraph. New-build apartments are “flying off the order book”, boasts a press release from Crosby Homes in Manchester, and as a result those who have bought off-plan are making huge fortunes, thanks to the fact that they enjoy two years’ of capital growth while the development is being built.
But are these fortunes really being made? With the help of website Nethouseprices (where you can check exactly what the flats sold for when developments were first launched), Clark finds that Crosby Homes’ Greenquarter flats haven’t actually made any money at all for their investors. Apartment 9.3b, Melia House, is currently for sale at £133,000 – the owner paid £132,000 for it on 29 November 2004. So after paying stamp duty, estate-agents’ fees and legal costs, the owner will have suffered a significant loss – even if he does manage to sell at the asking price, something that would make him a rarity in today’s beleaguered market. Buy-to-let investors rarely take into account the fact that house prices can, and often do, fall.
They also often fail to understand the extent of both the start-up and maintenance costs of being a landlord: it can be a good long-term investment, but you need plenty of cash to sustain it. The short-term cost of getting started can be surprisingly high, Amer Siddiq, founder of the buy-to-let advice service Property Tax portal, told The Mail on Sunday. You generally have to put down a larger deposit on a buy-to-let flat than one you are going to live in. Then there’s stamp duty. Gordon Brown’s doubling of the threshold to £120,000 doesn’t help those buying in the southeast much, given that everything costs significantly more, so that needs to be factored in. Then there are interest rates to take into account: never assume that the rate you start out paying is the rate you’ll keep paying: inflation is on the up, so there is every chance that interest rates will follow. You may also have to pay an upfront fee of several hundred pounds even to get access to the best deals.
Next, investors will need to have enough reserve cash to cover council tax, utility and other bills from the moment they take ownership. And landlords could also be responsible for water bills once the tenants are in residence, to say nothing of the mortgage itself when they have no tenants. According to the Association of Residential Letting Agents, the average buy-to-let in London and the south east stands empty for almost a month between tenancies. And using a letting agent to help find tenants can cost far more than you might expect: agents can charge up to 20% of the rent, and often even charge ‘renewal fees’ every time a tenant extends the lease.
Buy-to-let fans might also be interested to know that their investments have recently done worse than a boring old FTSE 250 tracker fund, says Rosie Murray-West in The Daily Telegraph. According to Investment Property Databank, the average total return from buy-to-let across Britain in 2004 was 9.1%. The tracker would have returned 12.8% – and without any of the hassle.