Pessimism overdone on home front

Anthony Hilton
13 May 2009

Ever since the financial crisis began, there has been an underlying masochistic British assumption that house prices would plunge, that there would be forced sellers and repossessions everywhere, and that the wreckage would take years to clear.

Well no one would claim it is comfortable right now, but it is a lot better than we were led to expect. Redrow, one of our leading housebuilders, announced yesterday that it had cleared enough of its unsold stock to start building again. Estate agents have for some months reported a significant rise in viewings, and while these have not turned into a major recovery in purchases, it shows the interest is still there.

This week's survey of chartered surveyors — a more reliable housing market indicator than the views of estate agents — also suggested that activity levels have turned a corner, with rising buyer interest and a slight uptick in sales. Others report that, while in the first quarter sellers continue to cut prices, the rate of decline is half what we were seeing last year.

Meanwhile, unemployment — though it has increased considerably in recent months — has not brought about a parallel increase in repossessions. Much to the disappointment of the masochists, perhaps, things are not unfolding as expected. Whatever it says in the headlines, the reality underneath is considerably less gloomy.

Lord Turner, chairman of the Financial Services Authority, yesterday gave some clues as to why this might be. In recent meetings with middle-sized companies, many of them have said that one thing making this downturn much easier to cope with than recessions past is the rock-bottom level of interest rates. And, says Turner, the same thing appears to be happening in the housing market.

It is not that thousands of households have somehow escaped being plunged into negative equity by the fall of between a fifth and a quarter in house prices seen so far. They have not. But the effect has been muted. Most owners have been able to sit it out because their mortgage costs have dropped significantly, and they have avoided the pain of turning a theoretical loss into a punishing reality.

This makes this housing downturn significantly different from that of the early 1990s. As Turner reminds us, between 1988 and 1990, mortgage interest rates rose from about 9% to 14% and stayed there for the following two years, with the result that mortgage interest ate up massively more of people's incomes. That meant many more homeowners ran out of cash and became forced sellers, which added greatly to the downward pressure on house prices.

This time round, while some people have benefited more than others from the cut in rates, on average the effect is very significant. Indeed, citing national statistical data, Turner says that total household disposable income after tax and mortgage interest actually rose by 6% last year — which, of course, also helps explain some of the current buoyancy in the High Street. As a result, even if unemployment continues to rise, there should not be the pressure on incomes this time round making a bad situation even worse.

As top regulator, Turner is not in the business of making forecasts. But he is in the business of being realistic and countering misplaced pessimism. So he says “it is at least possible that overall arrears and defaults from owner-occupied mortgages may be no worse, or even somewhat less bad in this recession than in the early 1990s, even if the fall in GDP is equally large or even larger, and even if the house-price fall from peak to trough is more severe.”

That may not be the kind of news to get us dancing in the streets, but it is a great deal more cheerful than a lot of the housing-market forecasts we've been bombarded with in the past year or so.

Low interest rates have let most owners sit it out and avoid turning a theoretical loss into a punishing reality.

… But recovery may take a while

Property millionaire Nick Leslau has flamboyantly announced his return to the commercial property scene this week because he believes values have fallen far enough to present real opportunity for those with the vision and nerve to re-enter the market now. But unlike Land Securities, which reported today, he comes to the market fresh and with no baggage.

Land Securities presents the less cheerful side. It had already warned that values had fallen 13% in the six months over last summer and a further 20% between October and this March and if anyone still had not got the point it launched a massive rights issue and sold Trillium.

And the news this morning is of more writedowns and no real sign that the gloom is lifting. Indeed there are many who say it is only the indulgence of the banks — who don't want to bring any more pain on themselves — which is keeping much of the rest of the sector afloat, and there will have to be some bankruptcies before the market clears itself.

Gloomy perhaps but it took more than a decade for property to recover from the 1970s crash so no one, not even Leslau, should be looking for a quick recovery.