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Housing Market Recovery Special – Part 3 |
| Tuesday 19 May 2009 |
The more information becomes available, the more it becomes evident that this housing recession is proving very different from its predecessors. The expected flood of properties onto the market has not happened and The Royal Institution of Chartered Surveyors (RICS) devoted most of their latest survey published last week, to the continued rise in demand in the housing market.
Sales in April edged up a little further, albeit from historically low levels, while new enquiries in the market increased for the sixth consecutive month.
41 percent more Chartered Surveyors reported a rise than a fall in new buyer enquiries - the highest figure for almost a decade. The reported increase in buyer interest in London is the second highest figure recorded since the series began.
This is the first time that surveyors have been universally optimistic about sales since August 2006.
It is also noteworthy that the sales to stock ratio – widely viewed as a key gauge of market slack - has risen for the fourth consecutive month indicating that some stabilisation in prices may occur later in the year.
Stage 3: Medium mortgage demand/Modest supply.
As we discussed in the last issue it looks like we are firmly into the second stage of recovery as confidence, along with demand is returning to the property market. The third stage of the recovery will only begin when mortgage dependent buyers are able to get back in the game – and for this to happen, we need lenders to loosen those purse strings. Let’s take a closer look.
Housing Stock – Regardless of what the doom mongers and blogger brigade have to say the biggest challenge for London in particular, is a shortage of good quality housing. Considered the financial capital of the world and with the largest aviation hub in Europe, London’s population is expected to grow to 8.2 million by 2016. We have previously discussed the fact that developers have mothballed developments, laid off their workforce or closed down all together. Looking ahead the long term worry is that the supply side of the housing market could be compromised for several years to come. With a reduced workforce, increased building costs due to a weaker pound and depleted land banks - developers would struggle to increase capacity quickly enough.
The Bank of England’s quarterly inflation report forecast that inflation, currently 2.9 per cent, will fall below the target rate of two per cent later this year and then stay below it until 2011. This means interest rates could stay as low as 0.5 per cent for an extended period of time and will come as excellent news for borrowers on tracker mortgages or their lender's standard variable rate. It will however also deter prospective sellers to put their properties on the market if selling up means having to apply for a new, higher rate mortgage.
This lag in supply along with pent-up demand will see house prices “bounce”.
Mortgage finance – Once bitten, twice shy the old saying goes. Many UK banks had invested large sums in sub-prime backed investments and have had to write off billions of pounds in losses. But it got worse. Investors became nervous about buying any investment linked to mortgages, no matter how high their quality.
Many of the UK’s banks had been using the investment markets to fund large chunks of their mortgage business (a process known as securitisation). So no investors buying mortgage backed products (CDO’s) means no mortgages.
Both investors and banks will remain risk adverse even in an initial upswing and a return to the years of easy credit is very unlikely. With lenders short of funds and more sensitive to risk, borrowers will be denied access to the best mortgage deals unless they have a good credit score, reliable income and a substantial deposit - often 25% plus.
Buyer’s activity – As we move into this stage buyers will have sufficient confidence over their job security and earnings to consider increasing their mortgage commitments. Many will feel that the worst is over and that prices have stabilized enough to justify taking the plunge. Many will hope to “time the market” just right by buying at the bottom and make a quick buck. These new buyers, along with those already active in the market will lead to a significant increase in the demand for good quality property – which will be in short supply. The basic economics of supply and demand means that sellers will increase their prices accordingly.
Stage 3 will be the recovery stage most sensitive to the depth and length of the recession as it is only likely to start when credit liquidity eases, banks increase their loan to value ratios and buyers have sufficient confidence over their job security and earnings to consider increasing their mortgage commitments. For the investor this could mean a growing pool of tenants even if property prices bounce along the bottom for a while.
Wishing you health, wealth and happiness,
Mike Smuts
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