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Housing Market Recovery Special – Part 1 |
| Tuesday 21 April 2009 |
It’s often said that no news is good news, but sometimes I think it’s rather a case of good news being no news – as far as the media is concerned anyway. There have been a few drips and drabs since the start of the year but the steady stream of good news is now clear for everyone to see – if you choose to pull your head out of the sand that is. Newsreaders report on it while rolling their eyes and you can almost taste the cynicism in some articles. A stark comparison indeed to the gusto with which these same individuals reported on the downturn. But enough of that – let's look at what there is to smile about. First off J.P. Morgan, Citigroup and Goldman Sachs surprised the markets last week with a combined first quarter profit of $5.3 billion. This week retail giant Tesco posted sales of £54.3bn in the 12 months to February – the biggest ever for a British retailer.
But most importantly two highly respected economic institutions released statements yesterday saying the worst of the downturn is behind us. The Confederation of British Industry (CBI) said the slowdown should ease in the second half of this year and the ITEM club said drastic moves by policymakers - interest rates at a record low and the Bank of England boosting to money supply through quantitative easing - gave grounds for optimism. It’s worth noting that both of these institutions use the Treasury's own model to measure the economy and both have been pretty pessimistic in recent times.
It would be ridiculous to talk of an immediate bounce back, but looking further ahead, what can we expect of the UK housing market? Over the next four issues I want to take an in-depth look at what I believe to be the four stages of recovery and where in the cycle we find ourselves. The four stages we will discuss are:
Stage 1 – Low demand and low supply.
Stage 2 – Modest demand and low supply.
Stage 3 – Medium demand and modest supply.
Stage 4 – High demand and high Supply
Low Demand & Low Supply
Before any market can recover you first need it to bottom out and establish a price floor. This first stage of recovery is characterised by a low supply of property coming to the market and a low demand for property from prospective buyers. So are we there yet? Let’s look at the facts:
Housing stock – The number of homes being built in Britain has plummeted to its lowest level since the Second World War. Many developers have gone belly up and the majority of projects have been put on hold. Fears that homebuilding will grind to a virtual standstill in 2009 forced the prime minister, Gordon Brown, and housing minister, Margaret Beckett, to call a crisis meeting with several industry bodies at the end of last year. The consensus of the meeting was that not much can be done until banks start lending again and there is now considerable doubt whether the government can fulfil its target of building 3m homes by 2020. Prospective sellers deterred by lower prices are sitting tight.
Mortgage finance – Figures from the Council of Mortgage Lenders (CML) show that new loans for home buyers fell to 50,300 in January, the lowest level for nine years. The CML also said that lenders' tougher loan criteria were forcing borrowers to put down larger deposits and accept smaller mortgage offers than before. Banks have been demanding larger deposits from buyer and many first time buyers who first cheered the housing slump out of a misguided belief that it would give them access to the housing market found themselves locked out by tighter lending conditions. Some banks withdrew buy-to-let products while other refused to lend on new build properties.
Buyer’s activity – Enquiries from new buyers reportedly reached its lowest level in November 2008. Since then it’s been rising steadily for the past five months. Many estate agents and other so-called property companies have closed down or gone looking for easier sales in other markets.
Keep all of the above in mind as you read the next few stats from the Royal Institute of Chartered Surveyors latest report. The number of new buyers registering with agents climbed for a fifth month, with the index reaching the highest since 2003. Surveyors’ optimism about sales and prices rose. UK mortgage approvals rose 4 percent in February.
Stage 1 completed. In fact I believe we are half way through Stage 2 already. Maybe I should have written this series earlier? In the next issue we will take a closer look at Stage 2, why I believe we are firmly into this stage already and how to profit while the masses still believe all the negativity.
Wishing you health, wealth and happiness,
Mike Smuts
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