London leads the price fightback

Lending Strategy 01 November 2009

Low interest rates and falling property prices have left wealthy investors looking for alternative asset classes to put their money in. In response, top store Harrods has started selling gold bullion over the counter.

It is the only place in London where investors can purchase a 12.5kg gold bar off the shelf. I have a vision of the great and good dragging sacks of gold bars through the store towards their waiting limousines.

But do people really need to rush to Harrods to turn their assets into gold or is property, that old bastion of wealth, set to make a comeback?
The shortage of homes on the market combined with strong demand to fuel a £6,188 rise in prices in England and Wales in the four weeks to

October 10. The increase was the biggest since February last year and the largest in October for six years, according to property website Rightmove. It left the average house costing £230,184 - up 0.2 per cent compared with the same period in 2008.

Rightmove says this is the first time it had recorded a year-on-year increase since June 2008.

The annual gain was led by a strong recovery in London, where a combination of property shortages and higher demand has left asking prices 5.2 per cent higher than a year ago.

At £416,157 the average cost of a home in the capital is now the highest ever recorded by Rightmove, and 0.8 per cent above the previous peak in November 2007. Only around 95,000 homes were put up for sale during the month, 36% less than during the same time in 2007.

But there are still some fundamental weaknesses in the market. Political uncertainty could cause slower activity and there might even be a pre-election freeze next spring.

Furthermore, as Rightmove points out, any change in supply or demand is likely to have an exaggerated impact on price indices due to the low volume of transactions.

All areas of England and Wales saw price rises during the month except the North and East Anglia where prices fell by 2.5 per cent. London saw the biggest monthly gain at 6.5% followed by Yorkshire and Humberside at 5.3% and the South-East at 3%.

Other surveys too indicate that London is leading the recovery. Hometrack data shows single-digit annual declines in almost all the capital’s boroughs while central London seems to have cast off the grim memories of September 2008 and prices in the poshest streets are close to the levels seen in September 2007.

And investment bankers no longer fear for their jobs. Some see a house in Chelsea as the best hedge against inflation, which could be a side-effect of the Bank of England’s quantitative eas- ing programme. Central London’s surge is being driven by lack of supply but website

Primelocation.com says exuberance will be tested when reluctant landlords confront picky new buyers.

So the key factor behind the mini-boom is the shortage of supply. Owners may see the rise in prices as welcome but most consumers are still excluded by worries about jobs and credit.

And buyers, perhaps prompted by the mood among lenders, are more savvy. Estate agents report that they are reluctant to buy anything sub-standard unless it’s at a substantial discount. Amid this unexpected resurgence old concerns are returning. Agents are mindful that the

Stamp Duty holiday for homes priced up to £175,000 will end in December while Home Information Packs remain unpopular.

The spectre of inflation and interest rate hikes concern many, although most of us believe a hike in rates is unlikely for at least 12 months.
I am also concerned that headline figures are being skewed by price rises restricted to relatively small pockets, creating the impression of a national recovery.

Any recovery, while welcome, is fragile. I expect a sluggish 2010/11 with true recovery not arriving until 2012. Continuing high unemployment allied to wage freezes, tax rises and a rise in average mortgage rates will force sales that could even see prices slipping back.

Given negative speculation in the media you would expect consumers to be pessimistic but research from website Zoopla shows that 79% of home owners think prices will rise in the next six months. Perhaps we’ll just talk our way out of the slump after all.