Assetz® News - The Property Bears Versus the Property Bulls

The Property Bears Versus the Property Bulls

5th July 2009 |

It's going to be quite interesting on Tuesday night to take part in the latest Moneyweek property roundtable that will be published in the next issue.

It is always quite amusing to get an invite to Moneyweek as it's like walking into the (property) bears' den considering that Merryn Somerset Webb, one of the ultimate property doom mongers, chairs the meeting.

We'll probably get the usual doom and gloom from stock market analyst James Ferguson but last time (October 2007 - www.moneyweek.com/investments/property/are-we-heading-for-a-house-price-crash.aspx ) he reckoned interest rates were staying the same at best, or going up and in fact they came down. He also said 5.5% mortgage rates wouldn't exist in my wildest dreams by the end of 2007 but in fact they were still alive and kicking, no problem. And even today those rates are available to many borrowers.

James also said that huge numbers of buy-to-let investors would quit the market - they haven't. He even advised everybody to sell all their buy-to-let investments as they would not work in the future. Well they do work and better than for a long time - old purchases are now on really cheap mortgages as base rates have collapsed and new purchases are at massive discounts if you buy distressed giving yields of as much as 11% gross in the last few months.

Henry Pryor, a jolly good chap other than being a little pessimistic, and who is well read and well researched, was quite negative on the market primarily because he assumed people coming back to standard variable rate were going to be faced with higher borrowing costs than previously - in fact the opposite happened and those people coming off old fixed rates on to variable rates got very good new lower rates than ever before. He got that bit wrong because nobody in the roundtable, myself included, actually thought the Bank of England would drop rates by so much as they did in the end. He did get another piece right which was that scarcity of supply was keeping up prices and that has never been as true as today.

Merryn Somerset Webb continued the myth that there is an oversupply of property, particularly two-bedroom flats, all over the UK. This clearly isn't true and the under-supply situation of property as a whole and even two bed flats is just going to get worse and worse with developers building a mere 60,000 new properties a year at present compared to government targets of 240,000. The chances of speculative development finance for blocks of two-bedroom apartments in the city centre being offered by banks over the next few years are about as remote as Elvis being spotted on the moon (to misquote John Wriglesworth).

In this roundtable, I thought it was pretty obvious we were going to get an initial 0.75% basis point in this roundtable by summer 2008 and in fact we did indeed see it over the December to April period, something James Ferguson said was 'punchy stuff' at the time. The point I was trying to make was that no way on earth would the Bank of England allow the increase in margins charged by the banks above base rate, or LIBOR for that matter, result in higher mortgage rates, the bank would drop base rates to compensate - something that indeed did happen.

The UK property market as a whole underpins all of the banks' balance sheets and it was always near certain from my point of view that if the property market looked set for a significant decline, the Bank of England would act in order to defend the banking sector. They wouldn't do this if the stock market looked likely to crash however. Protecting the property market from excessive falls is exactly what happened, although nobody is phrasing it that way as defending the property market isn't exactly politically correct. Although there were a few scary moments during 2008 when the obvious things that should have been happening weren't happening as quickly as they needed to, in the end pretty much all of the right things that need to be done have been done. I think Gordon Brown getting many of these changes right and even leading the world in some cases in dealing with the economic crisis surprised many people, myself included. His lack of character to acknowledge the need for sweeping public sector cuts, however, will be the end of him.

The one area everybody got wrong, including myself, was how bad the credit crunch was going to be in terms of its effect upon house prices - Henry Pryor thought they would be down 15%, I thought up 5 to 7%, Ed Mead thought up single digit figures, James Ferguson thought down 3 to 5%, John Wriglesworth thought no change. James was the closest although he thought huge falls would follow that year and this has not come true. In fact, house prices went down 7.7% over the next year as credit was reined in dramatically. The fundamentals just couldn't hold up prices in the face of the onslaught on sentiment by the likes of the Ten O'Clock News and banks pretty much ceasing to lend over this period. Those fundamentals however, look like they are fighting back with a vengeance now that the hysteria has left the market with prices up strongly in May and likely to be up for the year as a whole in 2010.

It will be interesting to see people's views this time around at the roundtable this week with base rates at 0.5%, the property market stabilising at long-term historic affordable levels, and indeed looking quite strong, and with no mass market sell-off of buy-to-let property to undermine the market. So, in answer to the title of the last Moneyweek article, no we aren't looking at a house price crash, just a correction, and a forced correction at that. The overall supply and demand dynamics are going to produce some fairly surprising results for any remaining property bears out there over the coming years.