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It’s official. The property market is heading for a slowdown.
Nationwide reckons house price growth for next year will come in at 0%. Depending on your favoured measure of inflation, that’s a real-terms price fall of about 2%-4.5%. Meanwhile, big estate agents like Savills are starting to stroke their chins and gravely announce that times will be hard for those in cheap houses (under £350,000 is the new definition of cheap, it seems) and buy-to-letters in city centres – well, at least those in the North.
In London and the South East (where most of these big agents make all their money), life won’t be quite as bad, they reckon.
But they would say that, of course…
The weekend papers were filled with horror stories about the property market. While the personal finance sections rolled out the stories on how to sell your property in a buyer’s market, the main sections were full of woe about how the double-digit gains of the past are now history.
A crash is still unlikely, say the experts. (This is a fundamental rule of economics and investing, by the way. Experts and pundits will always say that a crash is unlikely or impossible until it actually happens. Here’s a small reminder from this week’s Economist: “In 1929, days after the stock-market crash, Harvard Economic Society reassured its subscribers: ‘A severe depression is outside the range of probability.’”)
Anyway, I was at the breakfast meeting on Friday where much of this weekend’s information was sourced. At the press conference, a series of high-profile estate agents – most of whose business was located in London and the South-East – solemnly admitted that the housing market was in for a tougher time in the year ahead.
They then went on to explain why it would hit the North, and lower-income homeowners hardest, while their clients in London and the South-East would see a slowdown, but be fine, basically. So tough times ahead, yes; but it’s not the end of the road for the London party and the influx of global wealth that’s been gentrifying the mean streets of Notting Hill.
Estate agents are a canny breed. They are, first and foremost, salespeople after all. And the best ones are very good at it. They know they can’t just stand up there and pretend that everything’s OK in the housing market. Particularly not when, on the same day, Countrywide admitted it would have to shut some branches, and that sales this month were running at half the rate they were in the summer.
So they cleverly chose a section of the market to be the fall guy – the area North of the M25, broadly speaking – and say that times are going to be tough there. That leaves them free to keep talking up the market in the areas where it actually matters to them.
That’s all very well. And of course, London and the South East is a wealthier region of the country and there are a lot more foreign buyers. But house prices and living expenses are also much higher. There are plenty of people earning £100,000 a year who are then having to take out mortgages for six times their salary to be able to afford a property. And we’re not talking the home of their dreams – it’s more likely to be the bare minimum they can squeeze their families into.
The coming UK property crash – and how to avoid it
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And if anything, the South is even more vulnerable to the credit crunch fall-out than the North. Fear of job losses and bonus cuts means that you want to keep the savings you have in a more liquid form than property. Even if the boys and girls in the City do get their bonuses this year, they aren’t going to be investing in property – they’ve seen the writing on the wall for that market.
But won’t this slowdown just end the same way as the last one did? With interest rate cuts and a re-inflating of the market? Well, that seems unlikely. For a start, the aforementioned Countrywide told the FT that cancellations are already running higher than during the “last ‘mini-slowdown’ in late 2004 and 2005.”
More importantly, banks are more scared this time. Lending never really tightened to any significant extent during the last slowdown. Banks just kept happily finding new ways to extend people’s debts.
But now it really is getting harder to borrow – and a lot more expensive too. And with a great deal of uncertainty still out there about how much the banks have lost – uncertainty that won’t even begin to be cleared up properly until we’re well into the reporting season next year – the chances of lending standards slackening off again any time soon are low.
All told, I think 0% growth is pretty optimistic.
Turning to the wider markets…
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In London, the blue-chip FTSE 100 index ended Friday 68 points lower, at 6,291, as banks weighed heavily. Alliance and Leicester led the fallers amid rumours that it could be facing funding problems. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 was down 37 points, at 5,523, and the Frankfurt DAX-30 closed 54 points lower, at 7,612.
Across the Atlantic, a late advance saw the Dow Jones end the week in positive territory, up 66 points at 13,176. The tech-rich Nasdaq was 18 points higher, at 2,637. And the S&P 500 added 7 points to close at 1,458.
In Asia, the Nikkei closed at its lowest level so far this year today – 15,042 – having fallen 112 points. And in Hong Kong, the Hang Seng was down 154 points, at 27,460.
Crude oil was over $1 higher, at $94.95, this morning, and Brent spot was trading at $92.97 in London.
Spot gold was last quoted at $789.00, off an intra-day high of $793.90. Silver, meanwhile, was at $14.54.
In the foreign exchange markets, the pound was at 2.0467 against the dollar and 1.3983 against the euro. And the dollar was at 0.6830 against the euro and 110.56 against the Japanese yen.
And in London, the government announced that the $25bn loan from the Bank of England to Northern Rock (NRK) would not be extended indefinitely. Shares in the mortgage bank had tumbled by as much as 13% this morning as investors worried that the announcement would drive away potential bidders for the bank. The statement said that bidders ‘should not assume at this stage that the current Bank of England loan facilities will be available’ beyond next February.
Finally, our recommended articles for today…
Are break-ups the answer for troubled banks?
– Whilst the merger wave hasn’t broken yet, there has been an interesting development in the financial sector: the suggested break-up of banks which have suffered in the recent credit crisis, including Merrill Lynch, Citi and, of course, Northern Rock. Scott Moeller explains why he thinks it would certainly be the best strategy for the latter: Are break-ups the answer for troubled banks?
The Bear Stearns saga isn’t over yet
– Remember how Bear Stearns kicked off the summer market misery when it announced subprime losses back in July? Well, it’s troubles aren’t quite over yet. Shareholders of one of the funds are now out for revenge – and the sheer scale of the Bear’s incompetence in becoming clear: The Bear Stearns saga isn’t over yet