May 2, 2008
Slump In New Houses Being Built Is Worse Than We Thought
There's pretty good news for buy to let investors in this rather terrible set of statistics.
We predicted in September last year that housebuilders would get in a terrible mess as high-volume presales to investors began to slow down due to the credit crunch and as discounts required by purchasers increased. We thought that it would be a pretty big slowdown in the new homes being built in 2008 and 2009 but it is beginning to look worse than we thought.
http://www.ft.com/cms/s/0/ddac21b0-17e4-11dd-b98a-0000779fd2ac.html
Housebuilders new home reservations are down around 65 per cent from this time last year. In a previous blog entry in January there was data showing that new housing starts were down forty percent but now most housebuilders are putting new sites completely on hold for the foreseeable future. With reservations collapsing so far it's not hard to see why.
So why is this bad news for housebuilders and their shareholders so good for buy to let investors and homeowners ?
Firstly the (soon-to-be-outgoing it would appear) government target of 240,000 net new homes a year was already being undershot at around 160,000 net new homes being built in 2006 and a little lower than this in 2007 with builders mothballing vast numbers of their sites. We will see a period of a few months where there are superb discounts to be had from developers before their overhang of stock is sold. After that there will be little new supply. The numbers of these properties being sold at these high discounts will not be statistically significant and therefore will not pull down house price indices particularly and the shortage afetr this will lead to significant support in house prices going forwards as we are going to be well over 100,000 new homes per annum short of the government target for at least the next two years.
Some people question whether there really is any excess demand for housing, questioning the supply versus demand argument for why house prices have risen so strongly in recent years. I would suggest these people open their eyes and look at the rental statistics. House price growth has taken a breather whilst many people are forced into rented property now. Huge demand for housing is now directed at the rental sector and is driving rents up and this wouldn't be happening if there was a significant oversupply of property rather than undersupply.
That's right, buy to let property is undersupplied right now hence rents are rising at historically very high levels - QED there is excess demand over supply and it just happens to be currently focused on the rental sector more than the purchase sector but it will be back in due course and not only support house prices but drive them forwards again.
We sometimes feel like we are the lone voice saying house prices are robust but also it would appear the only people looking at the data. Average house prices according to the Assetz House Price Watch (average data taken across all the main indices) were only down £211 in the first quarter of 2008, hardly a crash, just flatlining for now.
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So Capital Gains Tax Changes Were the End of Buy to Let ?
Or maybe not. Yet another silly theory debunked.
The theory of buy to let investors selling up en masse just because their tax reduces room between 24% and 40% down to 18% has been shown to be wishful thinking from the house price crash protagonists. It was pretty obvious this was never going to happen for several reasons ; firstly by to let investors generally invest for the long-term, secondly the market is a little weak at the moment if you are a seller, thirdly if anybody was going to sell they would have already brought the property to the market before the April tax change as all they had to do was delay exchange until the 6th of April in order to capitalise upon the new tax rate. There never was a rush of sellers coming to the market before April and any estate agent would have told you that if they had been asked.
Unfortunately the popular press don't sell papers just by telling the truth and looking at the data, it's a little dry. Right now bad news sells newspapers. Of course all my good friends in the press community are above all that and whilst they might agree with many of comments are keeping their powder dry until the market turns to the positive again in the near future. Then the truth will out.
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Rents Carry On Their Upward Trajectory
Rents are still rising strongly according to Paragon's latest survey. With a rise of 4% in the first three months of 2008 and 12% just over the last six months it is clear that tenants will continue to pay part of the cost of the credit crunch. We have long said that rents will rise strongly for years to come after a long period of minimal growth, even when people said this was wishful thinking but we've never been one to follow the mass-market opinion.
We have previously forecast 10% growth per annum for 2008 and 2009 but it is more likely now that we will see 15% growth both this year and next year on average across the whole nation. This will make renting very expensive and easily comparable with the cost of a mortgage however the huge swing towards renting recently is unlikely to abate due to it being unlikely that hundred percent mortgages will be introduced to gain any time soon.
First-time buyers may wish they could purchase to reduce their monthly outgoings on a mortgage versus rent but they're going to have to save up a big deposit and that isn't going to happen any time soon. Rents will continue to rise strongly for several years.
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Mortgage Rates Start To Come Down
Abbey this week announced mortgage rates were to drop and RBS dropped rates a few days earlier. http://www.ft.com/cms/s/0/020ecfa4-170d-11dd-bbfc-0000779fd2ac.html
This is probably the first sign that the squeeze on mortgage lending is beginning to slacken off but it will take a few more months before things return to a degree of normality, around September is my best guess at present.
What is normality post credit crunch? We still think base rates will stop going down at around 4.75% but we are beginning to think there is some evidence that they could go a lot further down without affecting inflation. More on that in a future post. We suspect typical buy to let mortgage rates will drop to around 5.5%, with home loans slightly more than that at around 5.75%. Anybody with poor credit is unlikely to get a mortgage in the next 18 months at least, helping fuel the rental market. The Bank of England intervention will ensure that there is enough money to go around for those that require mortgages but it will have taken several months from the announcement a couple of weeks ago by the time this new liquidity helps ease the mortgage markets.
The squeeze on mortgages might be temporarily painful if you've just had to remortgage or come out of a fixed rate period but for the many people still in the market buying property, the extra money off property prices from distressed sellers more than makes up for this.
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April 19, 2008
So the government wants student rents to rise even faster?
More silly government interference in housing proposed but unlikely to see the light of day. The intended review by CLG into the clustering of student housing in dedicated student areas of a town causing alleged problems in the community such as high vacancy rates in the summer completely misses the point and is superfluous in light of existing legislation. Local government already has existing HMO (Housing in multiple occupation) legislation that allows them to deal with the approval of housing for occupation by multiple individuals such as students and if a problem was genuinely being caused locally the HMO licensing procedure could be used to limit such property use and/or direct it elsewhere. There is no requirement for central government to attempt further legislation pushing further forwards towards a "nanny state".
Student housing is in very short supply in the UK given other government initiatives to increase student numbers aggressively year-on-year. Universities themselves are reducing their own dedicated student housing in the face of rising costs and limited budgets and the private sector that builds private halls of residence is constantly under pressure and limitation from local planners. Traditional housing for students is the safety valve for this huge demand.
Student rents have gone up 31% in the last two years alone and any kind of implementation by the CLG of further student housing restrictions would cause tremendous further rental inflation to the student sector as well as forcing students out into more far-flung locations and into traditional suburbia. Trying to spread student housing across the whole city instead of into dedicated student areas will create a vast number of complaints from NIMBYs as the naturally gregarious and boisterous student lifestyle encroaches onto leafy suburbia across the whole city rather than in one localised area.
Our view is that focused clustering of student accommodation in housing close to the university campus in a given town is very healthy for all concerned and with students staying over more often than not for the summer period, the extent of the student ghost town risk that the CLG quotes probably only extends to a few weeks at the most in August. Perhaps the next focus by the CLG would be city workers being banned from going on holiday at the same time in August when it too becomes a bit of a ghost town for this month.
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April 17, 2008
Bank of England steps in to inject cash into the mortgage market
We have been expecting state intervention in the credit crunch for some time, but only when BOE/Gordon Brown/ FSA understood a little better what was really going on with lenders and the mortgage market. Well they now do. On April the 1st (and it wasn't an April Fool's joke) we predicted on this blog that the Bank of England would step in and introduce further liquidity to the mortgage market by taking mortgage securities as collateral for more lending whilst also lowering interest rates - well they just did. ( http://news.bbc.co.uk/1/hi/business/7351073.stm )
We said then :
"In addition, we believe the press is overplaying the credit crunch's impact on mortgages - there is a short-term period where lenders are trying to reduce the number of applications through the door but once the Bank of England announces that it will take mortgage debt as security (provided the lender still takes the risk of that debt) we expect lenders to begin increasing their range of lending products, their competitiveness and therefore begin to creep their rates back down again."
The exact mechanism for the Bank to take mortgage securities and swap it for Gilts to allow the banks to start re lending in higher volumes (albeit in a more cautious way) is yet to be announced and we expect this by mid next week.
What this means for borrowers is that the mortgage market will get kick-started by allowing all the mortgages stuck on lender's books (that no-one wanted to buy) to be converted back to a more liquid form to permit re-lending again - it will probably take until September for some normality to return again but we expect to see an increase in Buy to let mortgages rather than a decrease within a few weeks. In addition the average deal should start to improve a little over the next month or two.
Of course the question remains - should the Bank have stepped in (at Gordon Brown's insistence) ? No it shouldn't unless it leaves most of the risk with the banks concerned - we understand this is what they intend so for the sake of the economy this was a good move but now means lots of new bank regulation to make sure the banks don't take advantage of this state-bailout so easily again in the future.
What does this mean for property investors ?
* Property prices are likely to remain firm. Average house prices have been flat for three months, not falling, according to the average of all the indices we track in the Assetz House Price Watch index - that is very robust in the face of the recent mortgage market problems and we expect strength to show itself in the second half of the year
* If you are looking for bargains act before the summer as improved finance will improve prices achieved and overall housing demand
* If you are due to remortgage over the coming months consider whether the deals after the summer will be better than now
* First time buyers have been scared off for a while so rental demand will continue to grow very strongly
* Poor credit rating borrowers are in trouble with remortgaging and we expect an increase in repossession and auction activity - we will be helping our clients access this market shortly so register your enquiry here ( http://investors.assetz.co.uk/pic-contact-us.htm ) for early notice of this new Assetz property investment sector
Update on 19/4/08: £50bn in new mortgage lending to be confirmed next week http://news.bbc.co.uk/1/hi/business/7355754.stm
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April 1, 2008
Number of new properties being built is set to collapse - further evidence
Yet more evidence that our prediction late last summer that new housing supply would reduce noticeably is becoming visible as more and more people catch on to the idea and go looking for the data. This is bad news for the government and their housing targets but good news for property investors and homeowners looking for strength in house prices through excess demand over supply.
http://news.bbc.co.uk/1/hi/business/7323589.stm
The worst is yet to come for developers who built little desired property or overpriced property and we expect to see new housing starts in 2008 and 2009 massively down on 2006 and 2007 figures meaning the housing shortage will get severely worse and rents will continue to drive upwards (no longer an Assetz theory of changes to come, but a market fact). Perversely, developers who have built in areas of low demand from first-time buyers or homebuyers will still be desperate for cash flow and need to sell to investors for as much as 20%+ off valuation even in a rising rental situation. The good news is this won't affect national house price averages very much at all and will only be a temporary glitch in pricing over the next few months. Once developers have cleared their books a little we expect these discounts to diminish again and rising rents to hold up house and apartment prices again following this "fire-sale period"
Both of these factors will of course increase property yields and the current slight upward pressure in mortgage rates will be substantially countered and beyond by these two new factors.
In addition, we believe the press is overplaying the credit crunch's impact on mortgages - there is a short-term period where lenders are trying to reduce the number of applications through the door but once the Bank of England announces that it will take mortgage debt as security (provided the lender still takes the risk of that debt) we expect lenders to begin increasing their range of lending products, their competitiveness and therefore begin to creep their rates back down again.
We also expect Bank of England base rates to come down fairly quickly now to 4.75%, there is the possibility of this happening in one go at the meeting in early April but otherwise in two fairly quick steps by the Summer (earlier than we originally expected). The combination of base rate reductions and greater liquidity in the market from these two actions by the Bank of England will result in at least half a point off mortgages but with banks still making excessive profits compared to a year ago.
Stuart Law
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March 6, 2008
Buy to Let remains strong
Interesting news from the Council of Mortgage lenders. http://www.ft.com/cms/s/0/39891096-e4d8-11dc-a495-0000779fd2ac.html
Buy to let investors are not being put off by the scare stories of the property market and are taking advantage of their improved negotiating power. The Council of mortgage lenders confirmed today that buy to let lending shows little sign of slowing down based upon figures up until December 31, 2007 for the last quarter. Advancing 84,800 loans in the period was less than the 94,300 advanced at in the previous quarter but it was still up noticeably on the last quarter of 2006.
In addition, the CML confirmed buy to let landlords were getting better deals than home buyers and confirmed our house view from Autumn 2007 that landlords would not be leaving the market in droves as commentators have been hypothesising for some time.
Interestingly, due to buy to let landlords being a better credit risk than the average homeowner, interest cover calculations dropped in the period typically from 125% to 120%, and this probably reflects the fact that rents are rising strongly. We forecast that many buy to let lenders will permit experienced landlords to borrow on the basis of just 100% cover going forwards once the rental growth is taken on board by the lenders as a statement of fact rather than just initial data suggesting this is happening.
It is clear that we are not in the middle of a housing crash, with prices barely down 2% from the highest prices of 2007 and up over 5% year on year, and instead we are just seeing a confused period where well funded buyers are obtaining extremely good prices temporarily. All the indicators from the house price indices point to strength in average house prices and indeed there are some indications of the rate of house price growth recommencing in the spring as suggested by the recent Rightmove data showing a 3.2% gain in asking prices in just the month up to their February report. Rents are rising, house prices are firm but bargains can be had and interest rates are falling - it is no surprise buy to let landlords are confident and looking forward to some increasing rental profits over the next 24 months.
Stuart Law
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February 24, 2008
Housing Shortages Are Going To Get A Lot Worse, Pushing Rents Up Dramatically
The supply/demand imbalance in UK housing is simply not going away, and is showing very strong signs of worsening in the short to medium term, making prolonged house price falls a very unrealistic outcome and we strongly suspect that many will be surprised by a return to house prices growth later this year and indeed for the next two or three years at least - not a very popular house price forecast view at present.
To understand the scale of the housing shortage and how much worse it is getting every year one only needs to look at the most basic facts. We estimate that there is already a housing shortage of around 400-500,000 properties. The Joseph Rowntree organisation thinks this will grow to 1.1 million by 2022. We think it will get far worse than that, far quicker. The reason is once again driven by the credit crunch, as well as government and planning errors and mismanagement. There were 160,000 properties built in 2006 according to the best estimates. This is likely to be 150,000 in 2007. Unfortunately, the credit crunch has severely impacted on the property development sector in terms of available finance and indeed the bank's willingness to lend on property development for the time being.
We forecasted in the autumn of last year a dramatic slowdown in property development and hence new properties being built for the next two years at least due to reducing inevstor demand and reduced finance. At one point we thought there would be a 140,000 properties delivered in 2008 and 2009 but we are revising that figure downwards to 125,000 for each of these two years. This is in the face of government targets of 240,000 new properties a year and lobbyists trying to get this raised to 280,000 a year in order to begin to slowly catch up with the backlog. This isn't going to happen. The National house building Council shows private housing construction starts have plunged by 40% in January. If that carried on we would be down to about 90,000 new property is being started in 2008, a lot lower than my prediction and guaranteed to cause a very sharp increase again in the balance of demand over supply.
On top of that local planners are making life increasingly difficult for developers and it gets harder and harder every year to build anything. Developers can't get permission to build, can't easily get finance to build and the only result will be a significantly increasing shortfall of properties per year. I was speaking at a conference this week with Julian D'Arcy, Northern Chairman of Knight Frank, and he actually used the word shortage when describing his forecast for the availability of rental property in central Manchester in the not too distant future - the first time I've heard anybody in a traditional property consultancy agree with our view that the much discussed oversupply of city centre flats is an unsubstantiated urban myth. He also confirmed our forecast in the autumn that developers would slow down their building plans but in fact he made it sound worse than we thought suggesting that next to no developers were starting on site on new schemes in Manchester in the near future - a complete standstill near enough and sure to help in the very sudden swing from slight oversupply to moderate undersupply of property over the next year.
The reality appears to be far more mundane - developers have indeed built substantial numbers of city centre apartments and supplied these at a rate greater than people have adapted to the city centre living. What people have not appreciated is that city centre living is achieving critical mass with cities looking less like building sites and more like attractive places to live. Demand is catching up with supply and it is extremely likely that a squeeze on city centre rental property will take place between 12 and 24 months time causing rents to escalate dramatically. Bear in mind all regular reports on the UK residential letting market are already indicating a substantial rise in rents in the past 12 months, just read my recent blogs for all the references.
All in all, there is an extreme turn down in housing supply combined with firm demand, rocketing population (and in particular single households) and rocketing rental demand that will lead to landlords continued purchases - there can only be one outcome - house prices themselves will be very firm and it is extremely unlikely there will be a crash and rents will rise dramatically at a rate not seen for a very long time.
It's interesting to hear Alistair Stewart of Kleinwort Dresdner say that there will be a serious fall in new starts of city centre apartments by developers and yet at the same time he thinks this will then lead to a crash in prices. In my book of economics, reduction in supply in a market leads to firm or growing prices and Alistair's rather perverse thinking is the type of thought process that led the banks to think sub prime lending was a wonderful risk-free investment and lost them getting on for $400 billion. Investment banks should be keeping rather quiet at the moment having made some rather shocking mistakes in basic investment decisions and straying into the unknown field of property is making them look rather silly. Paying a little more attention to their core business may have prevented the credit crunch.
As usual I'm happy to stick my neck on the block and be held accountable for my projections - I've got a lot of property in Manchester, the biggest city outside London, the biggest university city in the whole of Europe other than London and the best infrastructure of any city outside London. Two bed flats rented four years ago for 800 to £850 with or without parking - this dropped to £650 to £750 for the last three years but is now starting to rise. We reckon two bed flat typical rentals will reach £775 to £825 with or without parking by January 2009 and are likely to continue upwards to £875 to £925 with without parking by the end of 2009 due to the severe exceeding of supply by demand during this period. Don't worry if you own property elsewhere in the country, I do too, and rents there are going to be rising substantially too.
If you're interpreting the data any differently to myself then I'd love to hear from you.
Stuart Law
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February 18, 2008
House prices have started growing again - you heard it here first
The Rightmove house price index jumped this morning by 3.2% in a single month. Some are bound to say this is surprising but they weren't watching the small print and the chart in last month's Rightmove press release. It was fairly obvious this was going to happen and I explain this further down. House prices (asking prices) up £7,500 in a month - a sign of some strength to come later this year although not at this level every month clearly.
I have commented a few times over the last month that there was some evidence that house prices had started to move upwards again. Bear in mind that UK residential property prices are on average only 1.5% below the highest price they reached in 2007. That's according to the average of all house price indices in the UK that we record in our House Price Watch tracker.
If you're looking for evidence that UK housing is one of the most stable forms of investment available just compare this minor wobble to the prime UK commercial property market or the stock market as per my previous blog a couple of weeks ago.
In January, Rightmove issued data and a chart showing a severe upturn in vendor sentiment at the beginning of January. It showed a sharp upturn in asking prices from people putting their properties up for sale on this website. Regular readers of this blog will know that Rightmove represents what is known as a leading indicator - it shows asking prices, not agreed mortgages as per some house price indices and not the actual land registry data. Data recorded on the Rightmove index will not necessarily become the data on the land registry later on due to some discounting taking place but the trend in prices on Rightmove is very useful for predicting what will happen with the other price indices in a few months time. The Rightmove index overshot in the summer partly due to HIPs and also some people being rather over enthusiastic about pricing for houses that they rushed on to the market to beat the deadline. The February index announced today is another piece of data to suggest that January may have been the beginning of renewed growth in the property market but there is plenty more data to suggest this may well be happening and here are some quotes from some of the other market commentators :
Rightmove January : "Early January shows signs of market recovery despite time on the market and stock levels hitting record highs in December. Active start to New Year as buyer interest spurred by lower prices and falling interest rates. There is clear evidence of a marked increase in activity and average prices immediately after the New Year. In addition, much of the monthly fall is due to the final HIPs deadline for smaller homes attracting more cheap properties to the market. The January housing market therefore seems to be showing signs of its usual upturn, after several months of sellers readjusting their prices. Estate agents report a positive upturn in new movers and activity levels. The high number of potential homemovers looking is borne out by the number of visits to Rightmove, up nearly 20% on the first two weeks of last year. Last Monday was the busiest day on record, with over a million visits, viewing 20.9 million pages. The growth of households and ongoing desire to get onto the property ladder underpins demand, and there are sellers keen to sell."
Incidentally, according to Rightmove, national asking prices by property type to the end of January 2008 make interesting reading, flats and apartments are up by just as much (4.3%) as semidetached houses and more than detached houses and only a fraction under terraced houses growth rates.
Nationwide : "The drop in demand was particularly acute among first-time buyers, who found it increasingly difficult to raise the deposits needed to climb onto the housing ladder. After reaching a low point in September of last year, the buyer enquiries measure saw a modest recovery between October and December. This is not altogether surprising, as some potential buyers who had been priced out of the market may have recently had their interest spurred by expectations of lower interest rates in 2008 and the possibility of their bargaining position improving in looser market conditions. As the year progresses, a key factor to watch will be how much pent-up demand returns to explore the market, and how much of this is translated into actual housing transactions."
Halifax : "Sound economic fundamentals will support house prices in 2008. The economy is in good health; employment levels are high. The UK economy recorded its 62nd successive quarter of GDP growth in 2007 Q4, extending the longest running period of unbroken growth on record. The number of people in employment – a key driver of housing demand - has risen by 263,000 over the past year earlier to a record 29.36 million. There has, however, been a slowing in the rate of decline of new buyer enquiries during the past three months, suggesting that the downturn in activity may be beginning to stabilise."
Also Birmingham and Midshires confirmed last month that the average rent in the UK rose to £698 per month in 2007 from £617 in 2006, an increase of 13.1% in just one year for the UK as a whole.
And finally in all good negative market periods you get a moment when everybody gives up and is their most gloomy - I think we've just seen that with the RICS surveyors who are at their gloomiest ever which is one of the strongest buying signals you could see if you want to buy at a good price. For those of you not familiar with this theory you really want to be buying when the lowest prices are available and people being gloomiest generally coincides with this moment. Now is therefore quite likely to be one of the best times to buy from a motivated seller and that is the reason we're getting such good discounts off property at present, but as we commented before, this buying opportunity could be over by the summer as prices start to rise firmly.
So when we say house prices have started growing again this is very much a case of having spotted key market data and activity that you would expect to see preceding the rate of growth in house prices going up again. We got it right in July 2005 ( http://investors.assetz.co.uk/blog/?postid=7 )and perhaps we're right again - we will see for sure over the next two or three months but by then some of the very best opportunities will probably have gone.
Stuart Law
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