This is something that most Estate Agents will be very familiar with in their day to day dealings in the property market. Contrary to public perception, Estate Agents are more interested in the number of transactions than house price inflation. After all, it is no good if house prices have doubled and there is only one house selling in any village or town. So why have we ended up with a market place that is delivering so little property to the market?
In this article I will explore the various reasons – and there are many – why these dynamics are in place.
We are constantly meeting people who are keen to make a move but are reluctant to do so as a result of not enough choice being available to give them the confidence to put their own property on the market. Despite our advice to anyone keen to buy a property that they should market their own home and secure a buyer to ensure they are in position to move quickly; a great many people decide not to do this and end up disappointed. One can understand this reluctance if there is little confidence in a suitable alternative property becoming available. Classic ‘chicken and egg scenario’. However, this is more as a result of factors than the cause.
As everybody knows, these are at a historically low level and the cost of funding is now so low that most people, even threatened with the possibly of even having to think about making a move for any number of reasons, can afford to take a more relaxed approach as to whether they sell their property. This is completely different from the previous recession of 1989 – 1994 when we had interest rates at around 15%, plenty of money but at prohibitive cost. At that time, we had a less sophisticated lettings market, so most people were forced to sell their property. This meant there was an over supply of property becoming available resulting in downward pressure on prices. This time round, we have a situation where money is difficult to obtain (but the cost low), however even the most credit worthy individuals have to jump through many different hoops to arrange finance. This means that people are sitting tight and waiting for positive signals from the Government and from media that the market, not only in housing but in general economy, is improving.
Interestingly, this is something that is not debated enough in my opinion. Current Stamp Duty rates are much higher than they were 15 – 20 years ago and I think it should be renamed as a Property Tax. This has definitely contributed to people making a decision to extend their own property rather than moving to a larger home. We have calculated that Stamp Duty can often amount to 75% of the cost of moving! Add this to VAT and we estimate that the cost of tax as a % of the cost of moving rises to 81%.
I have spoken about this before but this is a very important factor that is influencing the lack of property coming to the market. Quite simply, the difference in prices between property bands is so high now that most people will examine the cost of Stamp Duty and the cost of improving their own property and make a rational judgment as to whether it is easier just to stay put, extend and mitigate their risk, rather than taking on a much higher mortgage to make that move. The supply of cheaper money, particularly pre 2008, enabled many people to borrow at a reasonable rate (which has subsequently been reduced even further) and extend their own property knowing that, in the very worst case, they would get their money back if they had to sell the property at a later date. Again, this cut off the supply of property coming to the market.
Hart District & the South East
Some of you may have already seen the very positive reviews in the Guardian and media generally about Hart District in that it is apparently it is the most popular place or best place to live in the UK. It is a simple fact that Hart District and other neighbouring boroughs have been resilient to pressures on the market place that perhaps other parts of the country have experienced. We are in the South East of England; 30 – 40 miles from London and even closer to Heathrow.
The whole of this market has been transformed since the early 1990’s and we now have a sophisticated Landlord and Tenant market. This enables people to hold property and rent rather than selling and taking a hit on any price reduction. Again, it enables home owners to take a more long term view about their asset, again, choking off supply of property for the For Sale market. Lenders are more supportive than they were in 1989 – 1994 when I can vividly remember people selling property at knock down prices when, on reflection, if they had rented rather than sold they would have benefitted from the subsequent recovery in values.
As an Estate Agent specializing in Land and Development in this area, I know only too well that planning laws are very restrictive and our clients have to jump through many, many hoops to get consent on what would be termed as normal residential development opportunities. Planning policies which include protection of wildlife have also choked off the supply of land to the market place; again, this has put upward pressure on house values at a time when this would not have been expected as a result of recent market conditions.
Planning is not going to get any easier and development is not for the faint hearted. There is a lot of risk capital involved and the developer only sees their profit and return at the very end of any particular project cycle which can take anything from 0 – 10 years. During that period of time they are in no control whatsoever of property cycles and, therefore, it is a highly risky venture. For example, we will be selling some houses in Camberley this year which our Land Department started work on in 2002!
Anyone old enough to have been buying and selling property in the 1980’s will well remember the days of the bigger developers like Charles Church, Beazer Homes, etc. building large Greenfield sites and supplying literally thousands of property to the area. This meant there was a supply of property coming to the market. Quite simply, there is just not enough new property being built to meet demand. I read somewhere that last year the number of new homes being built was at its lowest level since 1945. That cannot be right for a sophisticated economy with demands from a number of different groups of people for housing.
The Market this Year
I do not see any fundamentals changing and correctly priced property backed up by professional marketing will always deliver results.
The key ‘game changer’ is interest rates. Ironically any upward movement on rates may coincide with less restrictive lending resulting in more demand from buyers but values held back by an increasing supply of property for sale. However, that’s for another year.
Ed Mackenzie Smith