There’s been a lot written in the Press in the past few days about property prices. There’s been the usual house price reports from lenders, the RICS (Royal Institute of Chartered Surveyors) property market report, our own ESPC (Edinburgh Solicitors Property Centre) report too. The ESPC report is probably most applicable to ourselves as we market most of our properties on the east coast of Scotland. However, we do market properties across the Central Belt of Scotland and indeed as far west as Mull, so we have a keen eye on what is happening on the west coast and across the Central Belt. So what’s my personal take on what’s happening with property prices at the moment, based on what is being written and also what I am seeing ‘on the ground’? Read on…!
Stats Stay That Prices Are Falling
We ARE experiencing fairly static prices and I certainly wouldn’t say that prices are driving upwards, with the exception of ‘hen’s teeth’ properties in super-desirable areas. Statistics from pretty much every source (Halifax, Nationwide and our own ESPC) suggest that prices have fallen a little bit when compared with last year.
It’s almost impossible for us to make any kind of sensible analysis, on the volume of properties that we sell in a year, to see whether we are bucking the trend as it would only take a few disproportionately expensive properties on our books to sell and our figures would be distorted. Even ESPC, which advertises about 8 out of 10 properties that are sold in Edinburgh and a large number in Fife and the Lothians, has to state in its house price reports that not too much should be read into some of its figures because of a slightly unusual mix of properties having sold in the previous month.
However, since ESPC’s figures are based on a far larger cross section of properties, we have to assume they’re more accurate than our figures. These figures stated that prices had fallen by about 3.6% when compared to this time last year. Halifax (one of the UK’s largest lenders) also came out with the same statistics (okay, 3.5% drop), based on its customers’ properties.
But I Personally Don’t Feel That Prices Have Actually Fallen, So Why Do the statistics Say They Have?
My feeling, personally, is that property prices are not really falling. I certainly haven’t been going out to value clients’ properties and making a significant adjustment on last year’s prices if I’m comparing their property to a few that sold last year. So why do the statistics show that prices are falling? The answer, I believe, is that sellers in certain sectors of the market are now releasing the losses on their properties that, until recently, were only theoretical.
Properties that are actually selling (and that’s the key point) seem to be selling for about the same price as last year. Certainly this is what we are seeing with our clients’ properties. So prices do seem pretty stable amongst the category of properties that were actually selling a year ago, or two years ago.
However, the recent ESPC statistics suggested that the price of a one bedroom flat in certain areas of Edinburgh (e.g. Gorgie and Leith Walk) had fallen below ยฃ100,000 for the first time since 2006. However, we’ve been VALUING these flats in these areas at this level for a couple of years now. It’s just that they weren’t SELLING for that price because they generally weren’t selling at all. A lot of sellers, on hearing our valuation, either went with another agent or added ยฃ10,000 to the asking price to make it more palatable. As a result it wouldn’t sell. So they were sitting on a loss but the market wasn’t really reflecting that loss because the property wouldn’t sell.
But now those properties ARE selling. There was a time three or four years ago when, even if you wanted to sell at a huge loss, it felt like no amount of a price drop would make any buyer interested. However, one of the most encouraging things that I’ve been seeing in the property market in recent months is that properties in the ‘first time buyer’ price category have been selling. Indeed, speaking to a couple of financial advisors last week, they were telling me that a lot of what is written about mortgage availability for first time buyers is over-exaggerated and that, even with a relatively modest deposit, if you’re prepared to pay the interest then there are mortgage products out there for you. The increased activity that we’re seeing in this sector would bear that out. As a result, finally some sales data is actually filtering through to the national and regional price statistics for properties that have been worth the current prices for two or three years now, but that weren’t selling at all during that time. As a result, it’s creating the impression that property prices are falling.
So, What’s the Longer-Term Outlook for House Prices And the Property Market?
I’d suggest therefore that although it appears that these flats in these areas have fallen in value, in reality this has been their value for two or three years now. This sadly means that many people who bought near the peak of the market have lot quite a lot of money, if they sell. However, now that this adjustment is made, my opinion is that house prices are standing fairly firm. Prices, certainly in the areas where we operate, remain stable. Stability, given current inflation levels however, still translates to a drop in real terms though.
As Merryn Somerset Webb, Editor in Chief of Moneyweek, commented today on Twitter, the drop in average property prices since 2007 combined with inflation in the meantime HAS amounted to a crash (Merryn is well worth a follow on Twitter, by the way – @MerrynSW). The flip side of that is that, if prices HAVE crashed in real terms, properties ARE more affordable for first time buyers (and indeed second-and-third time buyers). Many commentators have been calling for years for a sharp correction in house prices. We got that in 2008/09 though it didn’t go far enough for most of them.
However, with inflation running at around 4.5% and house prices, even based on my analysis above, at best being static, what’s the longer term effect? Well, it means that property becomes gradually more affordable compared with other items that are going up in price in the meantime. It devalues the assets that we either live in or rent-out to others. And ultimately, it helps to correct the excesses of the property market that were created by lenders lending money to people who had little or no deposit on the basis of a continually-rising property market.
In my opinion, this is the least bad outcome of the lending excesses of the early 21st Century. A sharp, 40% drop in property prices would have been, in my opinion, ruinous for huge swathes of people. At least when a decline in value is gradual, people can adapt to the new reality. Families can decide to move home on the basis that, in the three month gap between selling their old home and buying their new one, the one they’ve bought won’t fall in value by 20%. They can make a decision as to whether or not they want to accept a 10% drop in real terms over the next three years if it means being able to own their own home.
I don’t expect property prices to spike upwards in the near future and sadly the economic outlook for the UK in the next few years doesn’t look terribly promising. However, a gradual correction in property prices caused by price stability against a backdrop of general inflation seems to be likely and, in my opinion, infinitely preferable to a sudden burst of property price pain in the meantime that causes swathes of repossessions, bankruptcies and a total loss of confidence in property buyers and sellers that reintroduces the paralysis of the property market that we saw when the last sudden drop happened in 2008. I hope I’m not wrong!
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