What a weird old world of property it has been over the last few years. Back in 2009, it was only the brave that entered the real estate arena (of which we were one). With lending constrained and prices in freefall, this did not seem like the smartest move to many. But with fears of inflation, and real assets providing some hedge, this was the best of a bad bunch of investment options.
And so it turned out to be.
Prime London property prices rose (on average) ~80%, and for the momentum (rather than value) investor, often considerably more. Stocks rose as well and indeed outpaced property price increases (up more than 200% from their lows). However, with people more likely to be leveraged on their homes, increases in housing values likely had a larger absolute impact on a household’s net wealth.
When someone does well at something, they tend to personalise this, with the outcome being that people felt that they were good judges of property values. And then lenders – who are also often homeowners who have done well by their holdings – started to see that prices had recovered and were comfortable lending again, particularly since they were also good judges of property values. Then, the reversal became a trend, which could be extrapolated from, and this meant that everyone wanted to be in property.
Not just any property, but particularly in prime property, since price increases did not need to be supported by rising (domestic) income levels – which they weren’t – but rather by the numbers of the global ultra-wealthy – which were. And capital typically goes in and out of ‘quality’ assets in up and down markets, and it was no different on this occasion. And then from 2012 through 2014, the market was dominated by developers … sourcing, flipping, developing, exiting. Repeat. And the first two of these became actual businesses which meant that something was wrong … because in a functioning market this would not make sense.
Which meant something had to give.
Now, in 2016, with prices still 75%+ off their 2009 lows, the market seems to be starting to take stock and the most evident dynamic at play today is one of disconnect … sellers asking 2014 prices, buyers offering 2017 levels (forecasting – or fearing – the decline to continue). Add increased transaction costs (in London, at least) that saps liquidity and you have the market of today. Stalemate.
So, market dynamics have shifted again. With transactions costs as high as they are, potential home purchasers are trying to take two steps in one (e.g. from a flat initially bought by one of the parties in a couple, straight to a first family home – skipping the ‘young couple’s flat’ or from ‘small family house or flat straight to large house that you will have the grandchildren play in the garden of’ – skipping the normal, ‘family house’. It’s disfunction with a capital ‘dis’.
Unlike 2009, other asset classes have not moved downward prior, and we are still in a market where most things look unattractive (for a number of different reasons). And thus, property prices have not completely fallen out of bed. And interest rates are low which means that if you can get on the ladder (no mean feat) you can afford your perch (for the moment).
Back to the Knight Frank report (which you can download from our site here) … you can see a number of these dynamics at work. First, activity has been in the lower-priced segment of the market, with the delta between ANNUAL change in transaction volumes over last 5 years being 16% (from -8% for Westminster & Islington, -7% for Kensington & Chelsea to +8% for Newham, +6% for Havering). This has also flowed through to prices, with the best performing areas including Canary Wharf: 5.9%, Wimbledon 5.6%, City & Fringe 4.8% (likely first apartments and homes) and the worst performers being Fulham -9.6% (normal ‘family homes’), Chelsea -8.9% and Knightsbridge -6.8% (perhaps an effect of oil price declines).
And whilst we don’t want to over-rationalise residential property too much – we love it! – we would expect this trend to continue, with compression (albeit less dramatic) between the low and high segments of the market.
Until the low, at which point we would happily climb aboard the quality train again.
So, if you are stuck in your home for longer than you might have initially thought, let’s make sure it’s the home you want. Your Homyze are here to help with anything from painting to pools. We’re the people we hope you call when you want to talk property.