Property Values In 2008 And Beyond
Property right now is such a wild card.
You'd have to assume that prices are generally going to track both the health of the overall stockmarket as well as the economy in general. In fact, the positive correlation between these three has been pretty rock solid for the last decade or so, apart from when stocks got hit for a few years around the turn of the century.
The economy, and in turn the majority of other assets, have been riding high on plenty of cheap credit which has now definitely dried up. It's therefore very difficult to see how property can move higher in 2008. Already there's plenty of talk about houses not selling but at the same time prices not moving appreciably lower - this is of course the overall picture in the UK and not any specific area.
However, there are some incredible agendas relating to the overall support of residential property in the UK. Too much money, power, political strength etc is at risk if prices do move considerably lower and so I believe that the news we read and the statistics we're being fed might not be related to what's actually happening at the coal face.
Small Island – Is The Lack Of Housing Argument Valid
Nothing seems to divide the house price bulls and bears more than the limited housing supply argument here in the UK. We live on a small island with a very large and rising population coupled with a pathetically archaic planning policy. Add those facts together and it seems like demand should continue to outstrip supply and hence stop prices from falling too far if at all.
The trouble is that historically these same arguments have been used in other parts of the world and have proceeded to be false. Almost exactly the same points were used when Japanese property was flying high in the late 80s to early 90s but prices subsequently fell at least 50% and some say as much as 80% in value. Moreover, Japanese property prices have remained in the doldrums for the last 15 years.
The same points were made with reference to Hong Kong where prices in the 1990s went sky high, making some London properties at today's prices look absolute steals. Again, the market got massacred by over 50%.
Will Buyers Really Line Up At Lower Prices?
Ask any property expert and most will report that even if prices do fall there's plenty of buyers waiting to take advantage.
The two main groups are first time buyers who cannot afford to buy at today's values who will welcome any fall in value, and the second are property investors. But if the market does start falling and picking up downward momentum will these buyers actually materialise?
We all know that psychology plays a major role in all markets so what will happen to the mindset of all these buyers if they start to witness a downward trend in property prices? Would you buy today if prices had fallen 10% over the last 6 months or would you perhaps think that if they've moved 10% lower they can move another 10% lower, hence getting an even better deal.
So it is my theory that if downward momentum is seen to be developing in property values it will naturally feed off itself adding to further price drops. The media will also no doubt be a major component to consider in all of this as they have no agenda for needing higher property prices. So it's likely that a conveyor belt of negative and bearish stories will be added to the mix which could spook potential buyers even more.
Summary
Having said all of this I would expect quality properties (quality doesn't necessarily mean expensive) to hold up relatively well in any downturn and still make fairly easy sales. Quality property also relates to the so called Post Code lottery here in the UK where depending on which street you live, you're offered access to better or worse kinds of local services, notably good/bad schools.
I think this 'quality' argument is somewhat supported (for now anyway) by recent reports from America where it's the lower quality housing from the wrong side of the tracks that's being repossessed and knocked for 6 whereas the better style properties in more desirable areas have been holding up considerably better.
Overall though if anyone gave me a free £10 directional bet for property prices in 2008 I'd put it straight on lower prices and not just for this year but beyond. But I must stress that my forecasting record on property over the last five or so years has been dreadful, ie, I've always said it was heading lower.
Land Banking Companies - Tread With Extreme Caution
At a recent Money Show that we went to there were at least 4-5 of the so called Land Banking companies. These firms seem to buy farmland or other greenbelt sites for generally small amounts of money, package them up into smaller parcels and then try to convince potential clients that if planning permission is granted gains of 10x the value of the land are easily obtainable. They all use arguments such as -
- The UK needs to build 3-5 million new homes by 2025, and
- The government is starting to suggest that greenbelt land should be used for development
Most of the stands at the show were manned by young (under 30), sharp suited, hair gelled salesmen spouting the old line that 'you can't lose money with property', and 'it only ever goes up' etc.
We've also seen recruitment adverts for these companies which suggest that you need little if any qualifications apart from 'desire', 'ambition' and everyone's favourite 'a natural self starter' etc. If only those attributes were the secret to getting planning permission.....
We could be wrong but to us it looks as if the companies are far more interested in selling the plots rather than trying to get actual planning permission.
Their profits in effect have nothing to do with the gaining of planning permission and everything to do with selling the concept of 'if/when planning permission is granted'. All the risk is therefore dumped at the buyers' feet, and as one person who I met at the show put it to me 'will the majority of these firms actually be around in x years to help the buyers get planning permission'.
Successful Planning On Large Sites Is A Minefield Of Problems
For those readers who don't know much about the planning laws in the UK, the overall process of getting permission is extremely difficult to obtain. It is not a simple process such as contacting the local council and telling them you've got a 5 acre plot for them to consider.
Talking with a land agent friend this week he couldn't stop laughing when I said I wanted to hear his views on land banking companies.
He then went on to explain just how much pre-investment money is needed before a decent plot can even be considered for planning permission, a point which is probably never explained to the prospective purchasers of these small parcels of land.
Some further advice he offered was it is important to check out the backgrounds of the company directors and principals of the land banking firms to see if any of them have professional surveyor type qualifications such as FRICS or ARICS after their names.
If they don't then you should be extremely careful as it is probable the companies are being run by professional salesmen latching on to whatever product is currently in vogue.
Research Is ALWAYS The Key
We've long banged on about the importance of research when looking to buy or invest in any product or service. Put bluntly the more you understand about what you're buying the better the deal you'll get, and the chances of getting ripped off are greatly reduced. And clearly with these land banking companies this advice couldn't be more critical.
My advice as ever is to use the Internet to do your research, especially the message boards. See what others have to say about their past dealings with these firms (but also be smart enough to realise that not everything you read on the Internet is true).
It also might be a good idea to phone the head of the local Parish Council (if the land you're interested in is in/near a village) to hear their views on a local plot of land and it's possible future.
More information on the Land Banking companies can be found on the following links and it's interesting that the Financial Services Authority (FSA) are now actively asking people who have been approached by these firms to contact them.
