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Market Report September 2009
Prices Rise
The losses of the last year have been wiped out, with the Douglas & Gordon index of prices in September 2009 sitting 0.2% above where it was a year before. Most of this recovery in prices has come across the summer of 2009, where average prices increased by 7.6%. The fuel that has reignited the London market, which was dormant for most of 2008, was the surge in buyer registrations from March to June, up 48% on 2008 and only 21% below the peak of the market in 2007.
Where are these buyers from and why are they getting back into the property market? As we highlighted in our Spring Market Report, following falls from the Autumn of 2007 and the collapse in the value of the pound, Central London prices for buyers from the Euro and Dollar zones, had dropped by nearly 50% from the peak. The rationale to buy has therefore been very strong for foreign buyers, who have made up 60% of our purchasers in our Chelsea, Kensington and Notting Hill offices. Given the backdrop of continued employment uncertainties in the City and volatile financial markets, this goes to show that the attraction of London goes beyond its financial centre. The erosion of favourable tax status for “non doms” has also not deterred foreign buyers.
On the domestic front, the “assisted” first time purchase has been a feature in the return of demand. With prices down at least 20% from peak, the banks paying no interest and (until very recently) the stockmarket coughing and spluttering, investors have seen the virtues of “good old bricks and mortar”. Though finance remains in short supply, there are enough buyers, many of them parents, willing and able to put in 25% or more of the purchase price.
“Buy to let” is also back, meeting the needs of those many young professionals who do not have access to large deposits to get on the housing ladder.
Both these sectors, Prime Central London and South West London, have been buoyant throughout 2009 and remain so, with prime Central London leading the way with an 8.7% increase since April and the other South West areas recording a 7.2% average increase.
Traditionally in a recession, one would expect supply to increase and prices to fall. So why is this not happening? All the demand referred to above is “new” money coming into the market. There may have been widespread redundancies, but this has not increased the supply of property, which has in fact shrunk to 48% of where it was in September 2008, to exactly the level of September 2007. Historically low interest rates have kept the lid on the number of distressed sellers and job uncertainties have discouraged current owners to trade up, thereby releasing more property onto the market. This lack of property has been further exacerbated by the introduction of HIPS which, as predicted, has seen the demise of the speculative seller.
There is a consensus amongst commentators, including Ed Mead and Charlie Ellingworth in this publication, that there is something “unreal” about the recovery in prices. Central London residential property is a unique asset where there has been a pattern of supply contracting in recessionary times and demand returning quickly to bring a v shaped recovery in prices. The demand and supply balance is so out of kilter as we enter the Autumn market that it seems probable that for the rest of 2009, the recovery in prices will continue, though we would be surprised if the curve did not level out reflecting a slow down in the rate of growth in prices.
D&G Investment Management Limited has published research on the trends in Prime London prices, the supply/demand relationship, sterling and correlations between PCL and other asset classes like commercial property, equities and bonds. In summary, D&GIM's analysis is that the recovery , to-date , is following a very similar pattern to the last period in which there was an equivalent fall , then steep rise, in values (1989-94) - please contact syorke@dngim.com for more details.
As highlighted in our last Market Report, rental prices actually fell faster than capital values in the latter part of 2008 and the first part of 2009. The rental market has now stabilised and the average rental price increased by 6.3% over the summer of 2009. Not surprisingly, prime Central London rents with their reliance on City employment rose less fast (5.9%) than the peripheral markets of Battersea, Clapham, Putney, Fulham and Hammersmith, where rents have risen 6.5% over the same period. It is probable that this “bounce back” is partly due to an “over” adjustment in rents following the financial crises of last Autumn and partly a contraction in supply as “accidental landlords” find a more responsive sales market in which to dispose of their properties which would not move last year. Supply is approximately 13% down year on year.
MEH
