UK Property Market Update

10 March 2010

The prospect of a hung parliament is causing much revisiting of forecasts, including housing market forecasts.  Last December, it was difficult to envisage anything other than a change in government and that a change in government would produce an immediate positive sentiment for the housing industry as it has elsewhere (e.g. New Zealand).  It appeared that the combination of positive sentiment and an increase in mortgage lending would produce a stable market for both prices and sales volumes.
 
European investors were certainly counting on a change in government. As a result of the recent polls, suggesting that this might not occur, these investors have discounted the pound.  This is a forewarning of the likely devaluation that would occur with a hung parliament.  A rapidly falling pound, combined with a negative sentiment within the housing industry, is likely to impact upon both house prices and sales volumes. As a result of recent polls forecasting voter intent, we are already seeing a change in sentiment, with applicant enquiry reducing and buyers deciding to sit on their hands, waiting for the election outcome before making any moves in the property market.  This is especially true in the £1.5 mn+ price bracket in London and the £750,000+ market in the country.
 
The current hiatus in sales is not just because of the election, but has also been caused by agent overpricing.  There has been such a shortage of property coming to the market that agents have been optimistic in their price guides in order to win instructions in a very competitive market.
 
London property could benefit from a devaluation in the pound, as foreign buyers would consider present prices to be more attractive.  However, this would mainly affect properties from £350,000 to £1.5mn, the typical pied-a-terre.  The prime market is likely to suffer from the number of house sellers wanting to move offshore, or out of property as an investment.  We are already seeing a large number of £2 mn+ properties coming to the market, saturating demand.  The market at values below foreign interest would also suffer.
 
A large devaluation in the pound will lead to inflation, higher inter bank lending rates and higher interest rates for mortgage payers.  The main effects here will be in suppressing buyer affordability and increasing housing supply through placing pressure on mortgage payers.
 
There are two potential outcomes following an election.  A change in government should produce a slight increase in sales volumes, with prices remaining stable, as previously predicted. 
 
Alternatively, a hung parliament would most likely result in a reversal of recent price gains in much of the country outside London and in those parts of the London market not in demand from foreign buyers.  Many parts of the country have not seen a price gain since the market bottom was reached in 2009 so it is not sensible to talk about W-shaped recessions for these property markets.  These areas continue to bump along the bottom.  Homeowners not under pressure to sell, by far the majority, will simply hold on. This may reduce sales volumes.
 
Regardless of the election results, the majority of properties priced above 2007 levels in London will need to be adjusted downward to attract buyer interest.  Property in much of the country outside of London, priced within 10% of 2007 levels, is also in for a downward adjustment.  This will not be a correction in prices, as it might be reported, as these prices were, for the most part only achievable in a rapidly rising market in the first place.  May I suggest that the sooner the industry gets on with it, the better.