Bulls, Bears and Bouncing Cats

Dead Cat Bounce

Autumn 2010 sees yet more uncertainty in the UK housing market, with conflicting reports about whether October's increase in house prices indicates a general rise, or whether it was a ‘dead cat bounce' (small, brief recovery in the price of declining stock). Experts are also split on how the results of the latest spending review will affect the market. So, what is going on?

On the up ...

House prices rose at their fastest rate in 18 months during October 2010. This led to opinion articles claiming the market had "bounced back from the doldrums." Homeowners saw the average cost pushed up 1.8% to £164,919 - a significant 6.6% increase above the trough of April 2009.

However, does October's increase really mean the whole market is on the up and what does it all mean for you, the investor? To answer that question we need to look at the whole story.

... or a bear in bull's clothing?

The Royal Institute of Chartered Surveyors (RICS) reports that new buyer enquiries continued to slip in October 2010. RICS attributes this lack of demand to the continued difficulty in obtaining first-time homeowners' mortgages and a "cautious attitude" from purchasers. RICS chartered surveyors are also said to be reporting prices falling, rather than rising.

However, data from Rightmove shows the average number of properties for sale, per estate agent, has been steadily rising throughout 2010 and vendors increased their asking prices by an average of 3.1% in October.

Miles Shipside, director of Rightmove, explains: "Bullish pricing is a normal reaction to the start of the autumn selling season, after the summer holiday period, but it is unsupported by market and economic fundamentals except in a few areas of major housing shortages."

The three month ‘rule'

According to Halifax, October's 1.8% rebound appears more significant in the light of September's unexpectedly sharp 3.7% drop. The bank reports that over a three month period, prices are actually 1.2% lower and states that a three month timescale gives a better indication of underlying trends.

Halifax reports: "all the major house price indices are indicating an underlying slowdown in house prices, notwithstanding a divergence in monthly reporting." This downward trend is also backed by Nationwide, which says it stems from an increase of properties on the market against a drop in demand.

A balancing act

Nicholas Leeming, commercial director at property portal Zoopla, comments: "Many sellers are reducing prices in an attempt to secure sales before Christmas and avoid the traditional New Year rush of property coming on to the market. This means asking process have realigned with what buyers are willing to pay."

Paul Diggle of Capital Economics agrees: "House prices remain over-valued, even after the previous slump and need to realign to earnings. In the five years before the recession, house prices broke their historical link with earnings because of a glut of credit available in the market. Now we have returned to a point where credit is not so readily available, house prices will have to fall more in line with income."

Economists at the Ernst & Young Item Club also predict that house prices will fall another 5% before a slow recovery in 2012; and Capital Economics predicts house prices across the UK will slump by 10% in 2011.

The spending review

The recent cuts to the housing budget in the latest spending review could further damage first-time buyers' ability to get onto the housing ladder. The government plans to build just 37,500 affordable homes a year from 2011 to 2014. This is a 25% drop from the current target of 155,000 per year in the three years leading up to 2011.

The capital expenditure budget at the department for Communities and Local Government was cut by 75% over four years, leaving housing associations to make up the shortfall in funding for new developments by charging rents closer to those levied by private landlords. As housing association tenants are typically would-be first-time buyers in a rent-to-buy scheme, the cuts make it even more difficult for them to get onto the property ladder.

Mortgage broker Melanie Bien of Private Finance comments: "First-time buyers are the lifeblood of the housing market, but numbers are dwindling to dangerously low levels. Fewer affordable homes will make it even tougher."

A silver lining for landlords

The full impact of the spending review has yet to be seen, but what heralds bad news for first time buyers is excellent for the private rented sector.

Nigel Terrington at The Paragon Group explains: "The decision to move social housing rents more in line with the market rate will make private rented property an option for people who wouldn't have considered it [previously]."

David Newnes, estate agency managing director at LSL, comments: "An increase in the supply of rental accommodation will be necessary to meet this demand - and many landlords recognise this as an opportunity for investment."

Certainly, landlord confidence is growing in this uncertain market. A study carried out by letting agent network LSL Property Services tells us 50% of landlords saw increase in the number of prospective tenants during the three month period to the end of October 2010, with 69% expecting this to grow further over the coming year.

Landlord confidence has been boosted by the current and ongoing increase in tenant demand and the September 2010 record high in rents. This followed eight consecutive months of smaller, experimental, increases in rent.

Private rented sector is the place to be

David Newnes at LSL adds: "Optimism is growing amongst landlords underpinned by very strong tenant demand, which has pushed up rents to new heights. With mortgage lending conditions so tight and uncertainty over the direction of house prices, many would-be buyers are choosing to stay in the private rented sector for the time being."

A recent Association of Residential Lettings Agents (ARLA) report also states void periods being at an eight year low, currently standing at just 3.2 weeks. Ian Potter, operations manager at ARLA, says: "The rental market is incredibly strong at the moment for those working within the industry."

The perfect combination of discount and yield

Whether the market is a bull, a bear, or a bouncing cat, one thing is certain. The private rented sector remains incredibly strong. If anything, market uncertainty is a benefit for Buy To Let investors, as more and more people are forced to rent as opposed to buy. With tenant demand and rents at a record high, coupled with the slow and steady increase of stock, now is a prime time to join the savvy investors who are expanding their UK portfolios.

In our opinion, you don't have to worry about the current divergence in prices as we always source the best discounts and yields for our investor clients. For example, we currently have a portfolio of north London mews houses at 32% below genuine market value and with an 8.5% rental yield. We think this level of discount and yield in London is pretty remarkable, so whatever the market may do tomorrow, it is definitely working in your favour today.

If you would like further details of our current deals, want to chat to us about how best to expand your own portfolio, or have any questions at all, then call Russell Bonner on our UK hotline - 0333 444 0034 or email him at russell@axiscontact.com

Live with Abundance

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