Optimist or Pessimist?

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27 January 2009

"Once again, reading the lending figures is like standing in front of a Francis Bacon - bloody, bleak and foreboding."

Andrew Montlake, partner at Cobalt Capital, an independent mortgage broker

This said, many in the art world see Bacon as pure gold. It might also be worth considering the following.

"Be fearful when others are greedy, and be greedy when others are fearful"

Warren Buffet, New York Times Online, 16th October 2008

More Green Shoots

As we mentioned last week we have seen some signs of a change in attitude within the market place and as the week has moved on we have seen a number of other sources report an upturn in interest. The National Association of Estate Agents (NAEA) has reported a 7.5% increase in the number of applicants registered with them over the course of December compared to the November. This was also reflected by a 15% increase in the average number of properties available.

Rightmove has also recently reported an impressive upturn in potential buyer activity with the total number of email enquiries this year standing at 429,560 compared to 199,762 for the same period last year. Whilst this is a startling increase and implies a significant change in sentiment, it is worth noting that Rightmove's own growth and continued changes in the use of technology to access information may lead to some distortion from these otherwise promising figures.

Another statistic announced this week was from OneSearch Direct, a company that supplies data for home information packs, who had seen an increase of 71% in requests for data compared to December, although year on year activity was still down 33%. Also looking at the volume of Google searches for "Edinburgh property" we have noted a seasonal upturn during January, although, once again levels are below last year.

We have seen a similarly strong start to the year with enquiries up 20% on the first week of the year and a 112% on the first week of December.

The increased activity over the course of January may seem to offer some grounds for optimism; however, until banks start lending and buyers are willing to actually place their cash on the table, at an offer level acceptable to vendors, optimism may be a poor substitute for sales.

The optimism that is being promoted by a number of organisations also appears to be in stark contrast to the view of many economic commentators, as the recent January 2009 Housing Market Analyst by Capital Economic reflects. Some key statistics below:

• UK - 20% fall in house prices in 2009
• Scotland - 15% fall in house prices in 2009
• Total fall of 35% from peak
• Economy to contract by 2.5% in 2009
• Rental growth of just 1% in 2009 and 2010
• Unemployment rate up to 4.5% over the year

Whilst they say that low interest rates and government intervention may soften the potential depth of the downturn, the overall outlook is far more pessimistic than is being inferred in many statistics and articles that are making the headlines this week. However, it is worth noting that many new build developments have pre-empted and exceeded the 35% correction forecast and now offer genuine buyer opportunities in the right location. It will be the specifics of the location that will now be essential in determining their fundamental value.

It therefore appears that whilst some forecaster see the outlook for the coming year as desolate there is emerging anecdotal evidence of increased enquiry levels and increasing levels of footfall to new build sites. It may be that this is a false upturn before the predicted further decline or that these are signs that buyers are sensing that certain properties are now starting to offer good value. 

Try Before You Buy 

We have recorded an increase in New Build enquiries of 10% this week, as a proportion of all enquiries, and have also tracked an increased footfall and enquiry levels within the New Build sector. With this hint of increased interest in New Build, arguably the hardest hit sector to date, schemes that offer 'rent to buy' and 'try before you buy' may now have come of age.

The New Build sector has in many areas pre-empted price declines in the wider market and has offered comparatively attractive value. As appetite to buy increases with falling prices but credit availability remains constrained, especially for first time buyers, providing a method that allows buyer to potential commit to a property at current prices whilst circumventing the constraints of subdued lending may prove a successful way to unlock disenfranchised demand. 

Edinburgh on Recession 'Amber Alert'

A report released by the Centre for Cities has identified Edinburgh as being at a state of 'Amber Alert' when facing the possible consequences of the recession and anyone familiar with the MoD's BIKINI alert system will know this is not necessarily a good thing. The report highlights Edinburgh, along with cities likes of London, Bristol and Leeds as having a higher than average dependency on the financial sector, making it more vulnerable to potential jobs losses and economic turndown.

There is an obvious connection between the economic strength of a region and its housing market, so does this mean that a bleak outlook for the financial sector means an equally bleak outlook for property prices in the Capital?

The growth of the financial sector in Edinburgh over recent years means that it now employs over 30,000 people within the capital and therefore we should rightly be concerned for the impact that significant job losses could have on the city.

However, it is also worth noting that Edinburgh is not just a one trick pony. When considering sectors of the economy that have traditionally proved to be more resilient to recession, the public sector, education and health care are all usually at the top of the list; NHS Scotland is the largest employer in Edinburgh, employing 25% more that HBOS and RBS combined. Furthermore, the presence of a number of leading universities as well as the regional and national executive arms of government mean that over 60,000 of Edinburgh's +300,000 workers can enjoy a comparatively strong outlook for job security in the most traditionally recession proof sectors. Edinburgh also enjoys a fairly broad range of employment sectors, and diversity at times of uncertainty should prove to be a useful underpinning.

Beyond this Edinburgh also currently enjoys a low comparative rates of unemployment, and one of the lowest changes of rate in JSA between November 2007 and November 2008, according to the report mentioned above. Furthermore the highly educated and skilled workforce are also highlighted as a key factor why even if a significant number of redundancies did occur the workforce would be best placed to find alternative employment.

It would be foolish to underestimate the challenges of the tough road ahead but some of the fundamentals that underpin the capitals economy mean that the outlook for Edinburgh may not prove as bleak as some people may currently think. 

Lending and Borrowing

This week both the Council of Mortgage Lenders (CML) and the British Bankers' Association (BBA) have released their lending figures for December, showing the continued suppressed lending levels. Whilst it depends on which indicators you are considering as to whether November or December were the worst months of last year all the figures remain well below the previous year. The highest deficit was the value of lending for home purchases, down 60% year on year according to the BBA.

A unifying theme from the news stories and statistical releases this week has been the changing attitude of people to their money. Whilst drops in mortgage lending volumes may be symptomatic of issues within the banking sector, the BBA figures also show a decline credit card spending, with the number of purchases down 5.9% year on year. Furthermore there was also an increase personal deposits which is highlighted as an indicator of consumer caution.

This has also seen an increase in mortgage overpayments. Lloyds has reported an increase from 7,000 requests for overpayment in November, to 12,500 in December and 7,900 in the first two weeks of January. This is attributable to both people benefiting from the cut in interest rates and an increase in prudence given the financial turmoil that is ongoing. 

Bank Notes

The past week has seen extensive coverage and analysis of the fall from grace of Sir Fred Goodwin with calls for him to be stripped of his knighthood and now at the request of MSP Christine Grahame a police investigation in to the potentially fraudulent misleading of investors regarding the rights issue last year. This has now been supported by Lib Dem Leader Tavish Scott who has written to the chancellor urging a fraud investigation. This vilification of Fred the Shred is slightly at odds with the reported news that he is potentially being lined up to replace Max Mosley as president of FIA, Formula One's governing body. 

Links

The MSPs pursuing Fred Goodwin and RBS.
http://www.christinegrahame.com/
http://www.tavishscott.com/

Centre for Cities Outlook for 2009
http://www.centreforcities.org/assets/files/Cities%20Outlook%202009.pdf

CML Lending Figure
http://www.cml.org.uk/cml/media/press/2093

BBA Lending Figures
http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=145&a=15256

National Association of Estate Agents
http://www.naea.co.uk/news/news_details.aspx?id=458

BIKINI Alert System
http://en.wikipedia.org/wiki/BIKINI_state

Contact Us

If you have any questions, would like any further information regarding the above content or would like to discuss how the Rettie & Co. Consultancy & Research Team can help your business, please do not hesitate to contact:

Andrew Meehan
Researcher

t: 0131 624 9051
e: andrew@rettie.co.uk

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