Assetz® News - The Green Shoots of Spring in the Housing Market Are Coming Rather Early

The Green Shoots of Spring in the Housing Market Are Coming Rather Early

12th November 2008 |

Okay, I'm not saying that the housing market is recovering all of a sudden but the first signs of a firming up in the market are beginning. We see a record increase in the number of first-time buyer enquiries, a slashing of mortgage rates, RICS surveyor sentiment suddenly surging forwards and a continuously reducing LIBOR rate indicating that the banks are beginning to trust each other more that will surely lead to increased lending.

Many banks are done with their lending for 2008 and we expect a significant pause until January, particularly in the commercial lending sector. What we do expect however is LIBOR to drop to around 0.5% to 0.75% above base rate in the near future, for lending to increase into the spring and for some of the best mortgage rates ever seen. Sure, banks will make a good margin on their lending but with interest rates heading down in the general direction of zero they can make a fat margin and their customers can still get historically low rates.

Change of sentiment is a very difficult thing to judge. I remember trying to judge it through the 90s as lower and lower interest rates failed to revitalise a stagnant housing market year after year. It became amazing that no matter how obvious low house prices and low interest rates made the forthcoming boom it took an age to actually get started.

I suspect this time it will be a lot faster. Long-term dire performance in pensions and the stock market combined with a far more financially savvy property investor community, and indeed financially savvy homeowner community in many ways, will lead to a far sharper bounce this time around.

I've said it before and I will say it again that people will be shocked by the sudden surge in the housing market to come in the not too distant future. It will be driven by the implosion of the housebuilding sector and their loss of capacity to build in reasonable numbers, the overall demand for housing (currently focussed on the rental sector), the gradual recovery in lending capacity from the banks as they begin to trust each other again and historically low interest rates.

Nationwide today said the peak to trough fall from about last September will be 25%. Perhaps so for their own mortgaged clients (and their sellers) having to contend with surveyor's depressed valuations but on the land registry data represented in the financial times house price index I wouldn't expect a peak to trough of much different to around 15% to 17%.

So how come we are being offered so much property by developers at 30% or greater discount to the current RICS valuation? Just take Taylor Wimpey for example about to breach its banking covenants by January. They are desperate for cash to minimise the loss of shares to their bankers in exchange for this breach. These developers won't deal with individual buyers but our groups of buyers are having a field day when we gather them together for a joint bid.

We are seeing finished houses that were £200,000 currently available in modest numbers for £100,000 but you won't see that in a press advert. We're seeing two-bedroom apartments priced at £140,000 a year ago available again in small numbers at £65,000. We expect all housebuilders stock to have gone by the spring and the sudden stock overhang that creates an impression oversupply will be flip in an instant to undersupply.

These heavily discounted prices won't have much effect on house price indices as they are a small proportion of total transactions but as I said to the FT a few days ago these are the best prices you will ever see ever again. ( www.ft.com/cms/s/0/12aea790-af91-11dd-a4bf-000077b07658.html )

If you're a serious investor and you have a little cash to put into these properties you should take advantage right now. Don't believe the hype that the only serious volume distressed sellers in the market, the housebuilders, are going to be here for a long time. Once this stock is gone it will be gone for good and housebuilders will build much more cautiously again in the future and ensure that they are well behind levels of demand in order to hold up prices and profits. Don't wait until it's obvious with hindsight.