Understanding the Property Market

It is amazing how many people delay buying because they believe the market is falling, or rising too fast, or the market is steady and so may fall, and so on. In their defence they are encouraged to do so by the media which loves to paint all price rises as worrying and all price drops as the possible start of something bigger.

Friends, family and work colleagues are also very keen to offer their analysis, often based on that very same media. It would be interesting how many of these advisers would be interested in knowing what Estate Agents, Solicitors and Surveyors forecast for the industries that they work in!

How the market acts is actually surprisingly simple, but it is perhaps this simplicity that does not lend itself particularly well to headlines. It is crucial therefore to understand that:

• The current trend is for prices to continue to move up due to increasing demand for property and restrictions in new supply.
• Regionally markets move up and down all the time but this is rarely reported.
• The market has a traditional cycle that means that prices do move down quite regularly, usually twice a year.

The Current Trend in the National Property Market

The amount of land available to build on is restricted and the number of people who want to live in the UK is continuing to increase. One overriding principle to remember, in London, is that property prices have risen, almost continuously, since the end of the Second World War. In some parts of the city they have doubled every ten years over this period.

And the simple issue of supply and demand is expected to get worse. As of 2004 the Greater London Housing Authority Commission estimated that there was a shortfall of around 250,000 homes in the capital. That figure is expected to rise to over a million by 2020.

Despite this well known trend the situation is likely to be exacerbated by moves such as the continued introduction of more conservation areas, the protection of green spaces and ever rising immigration.

It can be argued these go far towards improving quality of life. Protecting open spaces gives us places in which to spend our recreational time. Immigration provides us with a richer and more cosmopolitan mix of cultures which broaden our horizons. But ironically they also make the country an even more desirable habitat and increase property demand still further.

The graph below demonstrates the problem by showing the decrease in the number of new homes being built over the last thirty five years:

The credit crisis has decreased the number of new dwellings still further as construction companies struggled to raise finances for projects. This has been especially acute in the South East of England where the number of additional dwellings dropped by 32% in the financial year 2009-2010.

We also need to factor into this the effects of migration to the United Kingdom. This is, according to the Office of National Statistics, currently running at around 200,000 per year.

In summary we have a situation where England and Wales are short of homes and the population is growing faster than they can be built. In 2010 there was net migration of 210,000 while the net number of new dwellings increased by only 128,000.

All this points to long term price rises but we must be very clear here. Long term does not mean continuous, just that property prices will be higher in ten years time than they are now but there might be falls along the way.

As a perfect example most people believe property prices in London rose non-stop between 2000 and 2008 (when the Credit Crisis began) but the truth is very different. Prices fell three times. Once in 2001 by 6%; then again in 2004 by 3% and once more in 2005 by 4%. They were not year on year falls but quarter on quarter so the graphs that most of the media use for reporting showed nothing.

The Difference with Local Property Markets

National property prices dominate the headlines and can often eclipse all else. But only investors search on a national level, most buyers are looking it purchase in a particular location.

So while, on average, property prices might increase or decrease - what happens on a regional basis can be quite the opposite. Individual areas can experience their own booms and busts which leave some reaping extraordinary short term profits and others languishing in negative equity for years. These stories are rarely reported because, to the media, they have too small an audience to be profitable.

Such incidents often happen in 'up and coming' areas which experience waves of interest and a classic case is the London borough of Clapham. In 2001 it was seen as 'the next hotspot' following a major investments by the supermarket Sainsburys. Buyers rushed in pushing the price of two-bedroomed flats up twenty percent to around £250,000.

But the interest was short lived and the properties soon lost over ten percent of their values. Buyers at the peak were left in negative equity until 2004 when the area truly started to come of age. In a heated Spring market the same properties reached peak prices of £270,000 before once again falling back in the Summer and then recovering in the Autumn.

What happened between 2001 and 2004 demonstrated a mini boom and bust on a local level. It happens continuously across the country and is noticed only by those it affects. For the many who owned properties in Clapham over a longer time period, they may never have even known they were in negative equity as by 2009 the average price had risen to £340,000.

What happened between the Spring of 2004 and Autumn of the same year is common to the Annual Property market and this is covered below.

The Annual Property Cycle

Despite what the media might say in its' headlines the property market does actually move down as well as up on a regular basis. There are dips and peaks which are generally misrepresented by the press causing mini panics in both directions.

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