Assume the brace position? Property Vision discusses the predicted downturn in the property market.

There has been a lot of talk in the press recently about the upcoming property crash.  Property markets don’t crash – a rather bold statement amid the stream of grim predictions that have greeted the New Year – but they do go down. Stock markets crash – because they can. They are virtually instantaneous markets that match buyers and sellers where, as in October 1987, more than 20 percent of value can evaporate in a single day. Property markets are famously illiquid and the process of decline is measured in months and years rather than minutes and hours. This can be no less painful; perhaps more so as the levels of gearing are generally much higher.
 
As the term ‘property’ is used generically to cover anything consisting of bricks and mortar, the differences between commercial and residential need to be borne in mind. Commercial property is much more directly reflected in the stock market, in the form of REITS and property companies. Where the stock market leads in applying big discounts to net assets, valuers and auditors often follow with swingeing revaluations that these days may reflect more their memories of what happened to the auditors of Enron than comparative evidence – which can be hard to come by in a market of many sellers and few buyers.  Aside from the shares of house-builders, the stock market provides a poor overview of the state of the residential market, for which we have to depend on the somewhat self-serving statistics of estate agents and mortgage lenders. Valuations by estate agents (which are how, for instance, the Savills residential indices are compiled) can, at this stage of the market, reflect both hope and wishful thinking; the same process that goes through the minds of countless buyers and sellers – which is not too surprising as most estate agents own their own property.
 
Weakening markets have their own pattern. The first stage is indignation. Evidence (perhaps a single sale) will be pounced on as proof that all is still booming and that the premium price a seller is asking is justified. When no offers appear, the response is to take their ‘unique’ property off the market until ‘sanity’ once more prevails. The second stage, denial, can take a long time and depends on whether the seller has to sell. Until they have to – unemployment, divorce, etc – they hang on until the penny drops and the anecdotal evidence becomes overwhelming; at which point they start to chase the market down. Resignation is the last stage where they realise that, unless they have no, or negative, equity, they are selling cheap but also buying cheap – not too bad a thing for anyone other than intermediaries; and a good thing, it is worth remembering, for anyone trading up.
 
So, are we predicting a downturn for our market? The answer is yes – in that it has already happened this year – but not as much as is likely in the mainstream market because the market we operate in is more nuanced with, crucially, less debt and less supply. Decoupling is the word on everyone’s lips but it must be doubtful whether Kensington can completely decouple from Croydon any more than China can from America. In a globalised and connected world, the forces that are now at work – very obviously in the credit crisis – are going to affect all economic activity to a greater or lesser extent.

How much of an effect we will find out in the next few months as it will be revealed whether or not the monetary authorities around the world have lost control. In the past, during crises, the interest and monetary buttons worked just fine; you lower interest rates and print money and the machine starts again reacting to ‘volume’ of money. However, if the banks won’t lend and borrowers can’t, or won’t, borrow, then the crucial ‘velocity’ of money is missing and you end up with – say it quietly – Japan. This is not an analogy that is very comfortable but, after fifteen years of asset inflation, it is a possibility that has to be acknowledged.
 
However, on the basis that things are never as bad – or as good – as people think, we could all be looking back on this juncture as yet one more slip, but caught again by the rope, as we climb the mountain of worry. There are, of course, reasons to be more cheerful, especially at the upper end of the market which is now so international. Many of these buyers have made their money in places where there is not much respect for property or human rights and the UK, particularly London, continues to be the destination of choice for buyers looking for a safe home for themselves and their money. The point is well made in an anecdotal story of a buyer fitting this profile interested in a new-build development in Knightsbridge: he was furious that he couldn’t pay the whole purchase price immediately – even though he was buying what was then just a hole in the ground.
 
There is still a lack of supply of ‘prime’ property, whether in London, the country or on the Côte d’Azur, and the number of buyers in all these markets could probably halve without too much denting of prices. The pattern that we are seeing repeated across all our markets is a continued demand for the so-called ‘super-prime’ properties, wherever they are – even where the mere ‘prime’ is softening.
 
The moniker of ‘super-prime’ perhaps needs some qualification as it is used too often synonymously with ‘expensive’ – which is not very helpful. ‘Super-prime’ is probably best described as property which a billionaire would buy without concerning him or herself too much with comparables. To illustrate this in reverse, there is a house in Chelsea which is on the market for £32 million. This is touted as ‘super-prime’ when the only likely buyer is going to be a space junkie. If you define ‘super-prime’ by price only, then sooner or later (if prices carry on up) almost anything eventually gets there.  ‘Prime’ is another overworked word which is now being applied to some unlikely areas to justify some unlikely prices. Perhaps ‘prime’ could best be defined as where typical successful international investment bankers aspire to live. Note the word ‘aspire’: they may have to, or chose to, live in Clapham for instance – but that doesn’t make it prime.
 
This definition is likely to matter more if credit continues to be tight and bonuses lower. It's one thing to spend 100 percent of your bonus on a house in Kensington but quite another to borrow 100 percent of the value of a house in Fulham. The former will probably continue to happen – but at more subdued prices and volume. The latter could well become a distant memory.

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