Fear - Unlucky for some

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13 March 2009

(Ir)rational Fear

We often believe we live in a time of science and rationality and yet there are some people that have a fear of today, Friday 13th. Paraskavedekatriaphobics have this fear despite the fact that we don't even know why today is associated with bad luck; theories range from expelled Nordic love goddesses to the Knights Templar and everything in between. Are buyers right to be fearful of entering the property market or is there opportunity for the brave / rational? 

An Inflationary Hedge and other economic horticulture

Now that quantitative easing (QE) has commenced and the first gilt auction has occurred, what can we expect the impact on the property market in the short to mid terms? First, any expectations will depend on the success of the Government's gilt buy back program; the initial reaction has seen yields on UK 10 year gilts drop to a 50 year low, beneath 3%.

With this in mind, all eyes have now turned to the UK M4, the broad money supply, as it regarded as the best place to show whether government money is making its way into the wider economy and not simply filling the holes left by toxic assets. Many commentators seem to agree that the scale of the Government scheme is of sufficient ambition to have a real world impact, although I think we have all learned over the past 18 months that everything is subject to revision and not to count our chickens until they are very close to the hen house if not actually on the roost.

QE has the potential to change the lending and economic landscape, hence its implementation; however, it is in an inexact science. Knowing how much and for how long to the apply stimulus is far from straight forward and the exact repercussions are unknown especially given changing and global nature of our current situation. 

However, where QE does promise to lead us further down the path is into a period of higher inflation. The analogy has been made to filling a bottle from the tap, you have to put enough water in to fill the bottle but you have to switch the tap off in time to prevent an overflow (the overflow being higher inflation) but the problem being that it is a rather sticky tap. 

Looming inflation poses a problem for investors, especially those in cash, where low inflation, RPI down to 0.1% in January, was favourable. With potential inflation reducing the value of cash and debt, beneficial for an increasingly endebted government, and with little return from savings, residential property with upward of a 5% yield suddenly looks like a far more appealing prospect than it did a couple of weeks ago.

To this end we have seen an increase in enquiries from cash rich individuals and investors, regarding investment potentials. The timing of market re-entry will be the balancing of further price falls with current market apathy and the power of the unopposed cash buyer, as well as the potentially impact of QE on credit conditions allowing a market defrosting and then the forecasted inflationary overspill effect.

Therefore whilst market indices may drop further it might be that buying the right property sooner rather than later may represent a stronger value in the mid to long term than playing the game in a more competitive market during a period of higher inflation. This is particularly true of certain new build product that has already dropped in excess of 20%-30% ahead of wider market retreat due to the pain being felt by an industry operating in a changed credit landscape. This is also true of high quality property which is likely to be the first to rebound when interest returns to the market. An example of this interest is in reports of Deka, the German fund manager, looking to buy prime property within the major UK cities, including Edinburgh and Glasgow, in the next few months before the 'window of opportunity closes'.

Home Reports

It was recently reported in a RICS survey that the home reports had led to an increase in market interest, according to 8 out of the 10 largest Scottish Surveying firms. At the same time the Scottish Law Agent's Society (SLAS) have voiced their view that it has negatively impacted the market and has led to wasted expenditure of at least £2m so far. So it seems there is a split decision.

It must be emphasised that these are still early days so the actual operation and impact is yet to be tested in a fully functioning market where all properties have home reports and there is competition between buyers. However, with so much uncertainty around at the moment potential buyers are finding some comfort in a professional valuation whereas before they were lost in a fog of conflicting headlines. This reference point has also be of use in moderating the expectations of many vendors who have been  convinced that their property is actually exceptional and exempt from the market correction being experienced by every single other person in the country. The upfront cost of the reports also establishes a seller commitment from the outset which has been both positive and negative for the market. Whilst I am told commitment is a good thing by my girlfriend the flip side is that many buyers now believe that there are only forced sellers in the market and this can lead to a differential in price point despite the home reports. It has also meant that many sellers who might have previously entered the market are now not testing the water leading to a diminished supply and further suppression of potential transactions. To what extent this can be attributed to home reports solely and not the wider circumstances is a point of debate.

There have also been some other issues aside from cost and inconvenience. The use of the home reports is somewhat constrained as it has been suggested by the SLAS that they are not always recognised by lenders and therefore an additional survey will be required, partially defeating the purpose of providing an accurate value. Also, for homes that may be of greater value (over £500k) and for period properties the age, the complexity of the fabric and values involved many buyers will still feel the need to offer subject to survey, again undermining a principle of their introduction.

In uncertain times and with buyer commitment so vulnerable, highlighting property defects at such an early stage has seen some more cautious buyers un-nerved early in the decision making process. Market uncertainty has also led to some questions as to whether valuations by surveyors ahead of market exposure have been erring on the cautious side in a falling and potential litigious market, further dampening prices. Furthermore with stock turnover low and average marketing periods long, as properties sit unsold, the validity of a report issued any more than a couple of months earlier is beginning to be questioned by buyers and their lenders.

There can be no doubt that home reports have changed the way in which the market operates; but then again so has the economic environment. While there have been reports of increased market activity: how much of this is natural market dynamics and how much is attributable to home reports is going to be a point of much disagreement.

Mortgage Lending

It has been a mixed week for mortgage lending news: January's figures announced by the CML yesterday show a new low for lending, down 59% yoy in terms of value and 51% in volume, falling 30% and 27% on December's levels. 

However, RBS has pledged a £1.7bn increase in new lending in Scotland during 2009 which will include the reintroduction of 90% LTV. This extension of lending has been welcomed with warm words from the Scottish Government, especially on the back of other recent RBS announcement for supporting SME. 

In addition to Deka, mentioned above, Property Week has also reported the return of other Germans to the British market in the form of the lender Eurohypo, Germany's biggest real estate bank, having taken a 4 month hiatus from the UK. Max Sinclair, co-head of Eurohyp's UK Divison is quoted as saying

'The UK is key for us. All banks have been looking at what type of business they want to be doing and we are no exception. We believe that the UK is one of our core markets outside of Germany.' 

If one swallow doesn't make a summer, does two?

Crime & Punishment

With Bernard Madoff has pleading guilty and being jailed for his £35bn fraud, it might seem that crime does not pay, however, breaking into the Forbes Rich List at 701, with an estimated fortune of $1bn is Mexican drug lord Joaquin Guzman. Mexico's most wanted man is still quite far down the list when compared with Pablo Escobar's drug lord record of 7th in 1989.

Links

SLAS - http://www.slas.co.uk/index.php

CML - http://www.cml.org.uk/cml/media/press/2190

Phobia Listing - what is the phobia of the things you fear? - http://www.phobialist.com/reverse.html#A-

Friday 13th - according to Wikipedia - http://en.wikipedia.org/wiki/Friday_the_13th

Red Rose Day - http://www.bbc.co.uk/rednoseday/

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Andrew Meehan
Researcher
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e: andrew@rettie.co.uk

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