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Market sentiment has improved since January with potential ‘green shoots’ in many areas, but not all. How long will it last?

Will this activity stabilise the market and reduce the economists’ predictions of further substantial falls, or will it hit the buffers? Simon Agace, founding Chairman of Winkworth, one of the largest independent estate agency groups in the UK, with over 40 years experience in the industry, examines the start of 2009 and believes we have not seen a false start, but a transition to a more normal market place.

What made the green shoots appear?

Unquestionably, low interest rates both encourage investment in property and discourage leaving cash as a deposit. To switch mortgages means you get a lower percentage loan to value and a higher interest rate, and whilst this lasts it will act as a disincentive to move home – unless you have substantial cash. However, despite the troubles, there are still wealthy people in the UK, as it is such a large economy. Inhibition has also been caused by the fear of further falls in the market. But maybe bricks and mortar has a higher resistance level than other investments, due to its nature, the fact that the UK will always be short of housing and that London will always attract worldwide interest.

The New Year brought with it three new types of buyer:

1. The London market is seeing an increase in foreign buyers; the strength of the Euro against the Pound is enticing European buyers to invest in English bricks and mortar, and the weakness of the Pound provides a further 20 - 30% discount on already reduced prices. Tom Dogger, Franchisee of Winkworth Knightsbridge & Chelsea believes 80% of his sales are now through foreign buyers, ‘At the moment buyers are mostly from Italy, Greece and other European countries, but I predict that there will be an increase in Middle Eastern buyers next month. This is largely due to significant difficulties in the domestic market of Dubai, which has experienced massive price falls over the past few months’. He continues, ‘they are all cash buyers and are typically looking for prime rental investment properties at sub £1.25m; smart apartments in attractive blocks, properties that will let easily. These buyers are taking a five year view on values; England is regarded as a safe haven for investment, which is very encouraging.’

2. Secondly, the provincial market has seen an increase in investor buyers; they’re out looking for value in quite substantial numbers - whether adding to portfolios or taking cash away from banks. Jayne Shelley, Franchisee of Winkworth offices in Sheffield says, ‘We are seeing an influx of investor cash buyers, from around the city and London, who are snapping up the repossessions and other stock that is negotiable on price. One seasoned property investor from London bought four properties from us last month [February] alone.’

3. The third market is the cash-rich: families buying for themselves or their children, who found themselves out of the market at the right time and who now need to get back in, and young professionals in rented accommodation, looking for their first property to buy. These are the buyers who now have luck on their side. Alex Thompson, Director of Winkworth Notting Hill has noticed a marked increase in activity from cash buyers, ‘There is a lot of cash in the market waiting to be placed, not least because many have lost trust in city investments. Relative to those in need of financing right now, cash buyers are in a strong position and are rejoining the market looking to capitalise on this.’

All three types of buyer are attracted by value. However, the supply of vendors willing to accept large discounts will remain short whilst interest rates are exceptionally low. This is easy to see from evidence that agents have a growing shortage of stock with willing and flexible vendors.

Government incentives to increase lending could cause a re-emergence of first time buyers. However, this depends on whether a 90% mortgage is truly 90% of purchase price, or if valuers discount the agreed price, making the mortgage more like 80% of the agreed purchase. As the market firms up, this will frustrate first time buyers who will be faced with having to bridge the gap with cash. Whilst it’s exciting to hear that there’ll be 90% mortgages, agents will wait to see the reaction of valuers to the firming up of the market before they will believe that this type of mortgage is truly obtainable.

What will the pattern be this year?

This is a difficult call because no one can confirm how long interest rates will remain low, or whether there will be pressure for interest rates to rise, taking into account protection of the Pound, attempts to draw savers back to the banks and how long the Government can continue to pump money into the loans market.

What is clear is that prices are firming up, all be it at a lower level, and what looks like the bottom of the market is in sight. Where quality properties are involved, there might be a slight correction in price. We concur as a group that prices seem to have stabilised at a 30% discount, but at 20% for a quality property. We doubt the 30% drops will last very long so the average fall has to be about 25%, which is in-line with our earlier predictions. What remains to be seen is how stable such price levels will be in the long term.

These price levels present an opportunity this spring, for those with cash. However stock levels have been decreasing. Value investors looking for bargains will find, with the current trend, that there are less to be had.

The year ahead will not be one where the sales volumes increase much. However, it will be a healthier market than the last quarter of 2008. Vendors of quality property will be able to sell at a more attractive price than was predicted last year, but still well below the price at the peak in 2007.

A major factor affecting the market will continue to be the opinion of the valuers. There is great uncertainty surrounding the percentage of loan you can obtain and double uncertainty caused if the valuer changes that ratio by what some people call ‘over down-valuing’. I believe there has been an overreaction by valuers, possibly to be excused due to market uncertainty. However, their benchmark seems to be the auction of repossession properties rather than market value. With the market firming up, valuers will now have more comparables to work from.

In summary

Some of these points can be blown away by reports coming from different parts of the market. For example, in Northern cities, new builds had up to 20% premiums and this, coupled with prices falling by up to 30%, could result in up to a 50% discount in total. These figures can’t be compared with re-sale property, where premiums were modest through market shortage. There are wide calculations as to how much prices have fallen, and all pundits can be right.

The English home ownership culture could well drive recovery as equity in homes consolidates. This may create more confidence in the housing market than in debt-ridden companies and could fuel a minor recovery for the UK, bringing more confidence to the economy. This could help ensure that the bottom of the housing market is in sight.