The end of the beginning
December 2008
We have now seen the end of the beginning, as Winston Churchill put it. The first identifiable leg of the property downturn – the ‘indignation’ stage – is now over. When? September 15th – Lehman Day.
Up until then, estate agents everywhere heard one of two things when they tentatively suggested to a seller a price that was slightly below the record set in the halcyon days when Northern Rock was still solvent. The first was that the house in question was much better than the one down the street that had sold a year ago for double what it had been worth only two-and-a-half years before – despite the fact that it hadn’t been decorated for the previous ten. The second was that they would wait until the market recovered and things ‘returned to normal’.
The result was a collapse in turnover. Buyers wouldn’t, or couldn’t, buy and sellers dug in their heels. Land Registry figures for June 2007 showed that there were 120,000 transactions in the UK. For June 2008, the figure was 50,000. A top-of-the-market estate agent with two offices in prime central London did only one transaction in two months – and their Fulham office failed to do any at all over three months. Aston Martin sold 150 cars in September 2007 and only 3 in the same month this year. One wonders what figures the Monetary Policy Committee were studying that it took them so long to work out that things were grinding to a halt. Maybe they need to get out more…
Lehman changed all that. With the benefit of hindsight, the credit crunch of the previous year resembled the ‘phoney war’, the period from declaration of war in September 1939 to the invasion of France in May 1940. It was officially a war and people were being killed – but a long way away. After the invasion of France, the threat became existential and involved everyone. So it was with Lehmans. Until then it was a crisis where we all learnt new permutations of the alphabet and to worry about the arcane workings of interbank lending. After Lehmans it was about depression, deflation, unemployment and the collapse of the financial system – not to mention a stock-market crash. The penny dropped and attitudes changed.
The result has been a somewhat counter-intuitive surge in property market activity – in London anyway. Many agents reported a busy October. What changed, post-Lehman, was that instead of it being ‘I’ll wait till the market recovers’ it became ‘I’ll sell now before it gets any worse’ – a fundamental shift in attitude. It was turnover at the expense of price as sellers’ demands adjusted to buyers’ expectations and the standoff of the previous year was resolved in the buyer’s favour.
How much down? Savills think 14%. We think it’s double that. It’s worth remembering that the Savills’ index is made up of a basket of property that is periodically revalued by their offices – not actual sales. As such it is really just a snapshot of how some (worried) agents are thinking – and there is an (understandable) tendency to talk the market up in the circumstances. In our view, given the tsunami that has hit the financial world, it would be very surprising if a market that had more or less doubled within three years dropped only 14% after a year of unrelenting bad news. It is, actually, hardly credible.
There is, of course, the ‘über-prime’ market – supposedly immune to the gyrations of the stock-market. Pre-Lehman it did look that way with billionaires bidding each other up to nine-figure levels on some of London’s top real estate. Post-Lehman, who knows? There is no market – or there don’t seem to be willing buyers to make one – but it would be a fair guess that the new level for these things is almost certainly a lot lower. After all, it has been some of the richest Russian oligarchs who have been the most high-profile casualties of the autumn rout.
While things look pretty grim, it would be inaccurate to say that, overall, it is a market with no buyers. We still have plenty – down about 25% from 2006 – but they are buyers next year. Among these is a sizeable number of what could loosely be called petro-dollar buyers – any sort of dollar or euro in fact – as anyone holding either of these currencies is at least 25% richer in buying terms than they were six months ago. Looking through a dollar/euro prism, the market has probably halved – and it’s worth remembering that it was just such a currency devaluation that kicked off the market recovery in 1992/3.
So now we are through the ‘indignation’ stage, what’s next? ‘Resignation’. This is the grinding bit where sellers reluctantly chase the reduced number of poorer buyers who now have momentum on their side. For what could best be described as sterling markets, where there’s no currency silver bullet, this is likely to go on until there is stabilisation in the City employment market and more than just a rally in the stock-market. On an optimistic note, this may happen towards the latter half of next year – the Chancellor certainly hopes so. But then it has been said that an optimist is someone who still thinks that the future is uncertain.