Expert predict the Welsh housing market for 2008

Jan 5 2008 by Steffan Rhys, Western Mail

Is the housing marking in Wales going to go boom, bust or not make many ripples in 2008? Is there still money to be made in bricks and mortar? Steffan Rhys asks the experts to predict the future of our homes

THE housing market in 2007 was riddled with contrasts. Soaring house prices in the early months gave way to a slowdown which, as we move into 2008, sees prices barely moving.

Meanwhile, a rush to sell among owners of larger homes desperate to escape the government’s Home Information Packs (Hips) turned into a barren spell once Hips were up and running and sellers were reluctant to pay the fees.

Outside factors have played their part too. Interest rate rises, the Northern Rock crisis, American sub-prime calamities, the credit squeeze – all have in some way or another impacted on the confidence of people involved or thinking about coming involved.

But have all these factors, which have dominated headlines for much of the year, really made much difference to where we find ourselves?

Has 2007, despite the ups and downs, the tailwinds and headwinds, really been that different from any other year in an inherently cyclical market?

And, bearing in mind all that has gone before, what can we expect from 2008?

The general consensus is that the market slowed down significantly in the second half of 2007 and will be flat for some, if not much, of 2008.

Nationwide, for example, forecast that house price increases will be at 0% this year, thanks to a slower economy, stretched affordability, tighter credit conditions and lower buy-to-let demand.

Bank of England governor Mervyn King said, before cutting interest rates last month, that tighter lending in the wholesale markets – where banks and building societies borrow the money to lend to us – would hit the market.

David Miles at Morgan Stanley, who investigated the mortgage market for Gordon Brown, said last month that a “significant fall” in house prices was likely.

All this affects Wales of course, but the principality tends not to suffer the peaks and troughs elsewhere in the UK market to the same extent.

In the words of one estate agent, it usually just “chugs on”.

So predictions among Welsh estate agents are more optimistic.

John Francis in Carmarthen and Knight Frank in Cardiff are predicting a 1% to 3% rise, Cardiff’s Thomas George is estimating a 3% to 4% rise.

The County Homesearch Company, the largest independent network of homefinders in the UK, says house prices, in West Wales particularly, would grow by 5% in 2008.

The company said coastal locations such as St Davids will remain in high demand, while properties close to thriving market towns such as Narberth in Pembrokeshire, Llandeilo in Carmarthenshire, and Newcastle Emlyn in Ceredigion will become major hotspots, particularly among those relocating and wishing to run businesses locally.

Riverside and estuary locations, such as Llangwm in Pembrokeshire, Cenarth and St Dogmaels in Ceredigion, and Llansteffan in Carmarthenshire, will also become increasingly popular with those looking for water views coupled with tranquility.

Carol Peett, the company’s local director in Wales, said, “I would expect West Wales to buck the general trend with prices continuing to rise, albeit at a lesser rate than in the past few years – roughly 3% to June with a further 2% to December 2008.

“The demand for character and period properties with an acre or two of land will remain high in West Wales, as will the demand for houses with sea or river views, smallholdings and farms. In Pembrokeshire, which has the only coastal National Park in the UK, planning controls are extremely tight near the coast meaning demand far outstrips supply for those homes with water views, creating fierce competition and forcing prices up.

“With excellent road, rail and ferry transport links, West Wales is attracting an increasing number of young families wishing to relocate there for a better quality of life, in addition to the traditional purchasers of holiday cottages and retirement homes.”

The average house price in Wales 12 months ago was £138,685, according to Land Registry figures, which was up 8% up on January 2006. By May, this had risen to £140,790 – 9% up on the previous May – which rose again, via some minor peaks and troughs, to £143,649 in October, the highest price in 2007.

But that was only a 7% annual rise, a drop from May’s giddy heights.

Building society Nationwide, meanwhile, has it that at the end of the year’s first quarter, an average house in Wales was worth £150,017, an increase of 0.8% on the last three months of 2006. By the end of the next quarter, mid-summer Welsh house prices stood at an average £154,969, up 2.6% from March. And, by the end of September, the last available figures, this had dropped to £153,655.

Halifax Building Society had the average house price at the end of the first quarter at £167,742, 12.5% higher than January 2006, before they dropped minimally to £166,691 by the end of the third quarter, still 9.5% up on 2006’s equivalent.

The differences in figures are due to the way organisations gather the relevant data, but what they all broadly show is that house price rises have slowed down.

And, while figures for the end of 2007 are not yet available, it is generally thought that they will show a further slowdown.

But, despite the whisperings of market crashes, recessions, and bankruptcy for those coming off fixed-rate mortgages to rising interest rates, those within the market are far calmer.

Nigel Jones, director of John Francis estate agents in Carmarthen, said, “The year didn’t entirely pan out as we expected.

“We didn’t expect the phased introduction of Hips and the impact that has had and continues to have on the market generally.”

Hips were introduced for all houses with four or more bedrooms on August 1, with three-bedroom houses needing one from September 10.

From December 14, they have applied to all houses, amid warnings from the Royal Institution of Chartered Surveyors that accessibility to the market was now “off the scale”.

“There was an enormous rush to put properties on the market to avoid paying for Hips,” said Mr Jones.

“What has followed is a big vacuum with very few three- or four-bedroom properties coming on to the market.

“So there have been extremes of activity. These have made very difficult working conditions. A flood of properties coming on to the market meant valuers being tied up by taking them on, and then the whistle blows and there’s an immediate lack of activity.

“Added to that, we’ve had interest rate rises [five in two years to 5.75%, then a 0.25% drop last month] and credit squeezes, so it has been nothing like anything we have anticipated.

“But the only thing that surprises me is that people keep getting surprised.”

Mr Jones says that, despite the effect of government and outside forces, the market remains strong.

“2007 was a good year to buy and sell property,” he said. “We’ve had relatively limited growth in prices and there have been more properties on the market so there has been more choice.

“But it still needs a bit more vendor realism in terms of price expectation. A realistic price has a good chance of selling quickly at that price. If it is too ambitious, it won’t. What is often wrongly assumed is that a drop in property price reflects a drop in the value of a home, but it doesn’t necessarily mean that. Rather, it shows the value might not have been realistic in the first place.”

But, despite Wales’ relative lack of tempestuousness, there is an odd struggle of influences nonetheless.

“What we have is a lot of opposites,” said Mr Jones. “When property numbers dwindle, prices go up. But that isn’t happening because of concerns surrounding interest rates, and mortgage lenders being a lot more stringent in their lending criteria.

“The banks and the building societies are worried about repossessions but at the same time banks are doing well on their mortgage business. People coming off fixed-rate mortgages, and having to deal with five interest rate rises in the last two years, have been hit.

“The banks are talking about 40,000 repossessions next year, which is a lot, though nothing like the early 1990s when we had a property crash and repossessions were up about 80 or 90%. This year I wouldn’t say the price rises have been particularly high. The biggest rises have been where the values were particularly low, like Ammanford, Milford Haven, Llanelli and Pembroke Dock.

“Most of Swansea and West Wales has seen very high price rises in the last few years but over the last 12 months it has also been seen more in the market towns like Aberystwyth, Carmarthen and Cardigan.

“And there has also been a ripple effect across West Wales, with more people moving west from central or south-east Wales. There have been more people from those areas moving across Wales than from England.”

Aside from those named above, and Wales’ main conurbations of Cardiff, Newport and Swansea, other areas which saw the best price rises in 2007 were in areas where prices were the lowest to start with, most notably Wrexham, Merthyr Tydfil and Blaenau Gwent.

And the Halifax, looking forward to this year, predicts that the “hotspots” of Newport and Pontypool will see significant property price hikes.

But Chris Parry, head of Uwic’s Centre of Finance and Economics, said prices were unlikely to increase again in the year’s first quarter, despite the recent interest rate cut.

“The market place is traditionally flat in January and February so a 0.25% interest rate cut won’t really have an impact until late February or early March,” he said. “We need a 0.5% cut to stop a five or 10% cut in property prices. But I certainly don’t see a 30-40% fall or a collapse.

“Had interest rates continued to rise it would have really hurt and people would have been in a situation of bankruptcy, but we are not in that situation. The housing market has softened and it could very well be, especially with new builds, that people will be offered sweeteners so I foresee a lot of new buyers coming into the market.

“It’s still going to be expensive for them and will still be several multiple of their salaries. But I would now encourage my 23-year-old teacher daughter to get on the market.

“Sub-prime lenders now need to attract the prime market and will start redefining products to attract the prime first-time borrower.”

Catherine Maunder, a partner at developers Knight Frank, whose Welsh operations are based in Cardiff and who specialise in new builds, said Wales still has huge potential for property developers.

Knight Frank has substantial new projects currently under development at City Spires in Newport, SA1 in Swansea and St Davids Two in Cardiff, which will be Europe’s largest mixed-use development. All are scheduled to be complete or substantially complete by 2009 or 2010.

“Everyone sees the potential in Wales. The growth over the last few years has been phenomenal but most people think there’s still room,” she said.

But analysts have claimed recently that the high number of new developments, particularly in Cardiff and Swansea, have left new flats unoccupied and the market overdone.

“It’s often the case that buildings go up quickly but three or four years ago people would have said the same thing,” said Ms Maunder. “The market is cyclical, though there may be a few more flats than there are people.

“The first eight months of the year were great. We had the best August we’ve ever had in the five years we’ve been open. But in the last couple of months it has been much slower.

“Less people came at the end of the year and selling is taking longer because those that do come want to buy so will take longer before doing so.

“Earlier in the year, first-time buyers wanted to get on the market quickly. There is always a time for first-time buyers and that was it.

“Christmas and its usual seasonal slowdown came a bit early, but in the new year an interest rate cut could pick it up again.

“Interest rates going down will make a big difference.

“I’ve been working in the market for 20 years and prices go up and prices go down. Things happen in the global market that can have a short-term effect and things can change in a moment, like it did on September 11, 2001.

“In 2002, people would buy property, sell and make around 17% profit on the figure, but the world is not like that at the moment and we are encouraging people to invest mid- to long-term, five to 10 years, because you know you will always make money at the end of that time.”

One area where significant worries have been raised going into the new year is the difficulty many borrowers coming off cheap two-year mortgages could face, with the double whammy of rising interest rates and more stringent lenders.

Among the scenarios touted are borrowers being frozen out of the top new deals and borrowers being unable to afford the new repayments, possibly resulting in bankruptcy and repossession.

“We’ve seen plenty of instances where someone has been told they can borrow, say, £80,000. Then that sale has fallen through and they’ve found another they want to buy, but without any change in their circumstances, when they’ve resubmitted the mortgage they’ve suddenly been told they can only borrow £65,000,” said Mr Jones.

“The lending criteria has definitely changed. Lenders are certainly looking into income multiples, other commitments and taking a much more risk-based approach to their lending.

“But I do not think mortgage lenders have been irresponsible. It’s difficult. They want to help first-time buyers get on the ladder and have been encouraged to be more flexible and innovative in the way they approach lending.

“The income multiples are higher but they’ve also been looking at how people manage their incomes, debts and lifestyle. If anyone has been irresponsible it’s the sub-prime lenders who have been lending to people already heavily in debt.”

The US sub-prime market has taken some of the blame for this, unjustifiably according to some.

“The sub-prime market in the US doesn’t affect the man on the street in Swansea,” said Ms Maunder.

“It only matters if you want to quickly buy and sell and it will also affect buy-to-let much more.

“If you can afford your mortgage then the US market doesn’t matter to you.”

Mr Parry agrees: “The US market hasn’t really affected us here. Our housing market is different and the sub-prime market in the UK is not as developed as in the US and there are more constraints on lending.

“It’s always going to be a problem when people come off fixed rates but a lot of lenders giving these fixed rates do not want to lose these customers because it’s getting more difficult to replace them.

“Anecdotally, there have been people coming off fixed rate mortgages who have got into trouble and into arrears, but lenders are living with that.

“If you’ve got a customer who has been paying a rate of 5.6% for two to five years then you offer them a rate of 7.5% which they can’t afford there’s sense in finding a sum they can pay. So we may find a renewal of the deferred mortgage.”

Nationwide says buy-to-let was a key factor in motivating the 2007 market, but this is likely to yield less returns in 2008.

“Interest rate rises have not been replicated by rent rises,” said Mr Jones.

“There are still people buying to let though they tend to be people who are there for the long haul and not just aiming to make a quick killing on the market.

“For 2008, the thing to remember is that property investment is for the mid- to long-term.

“A profit in the short term is going to be unlikely and people are going to have to look in terms of around five years minimum ownership.

“If someone buys a £100,000 house and wants to sell it in six months, they’re unlikely to recover that sum plus what they have spent on it.

“But history has shown over the last 50 years that property investment is as good as any and that is still the case.”

Nationwide’s chief economist Fionnula Earley said, “As interest rates and house prices have risen, rental yields have become much less attractive and investors have had to rely on house price growth to yield good returns.

“There is likely to be less interest in buy-to-let investments and the credit crunch is likely to lead buy-to-let lenders to tighten their lending criteria.”

And so we return to Hips. Mr Parry says they were the single biggest factor in slowing 2007’s housing market and, with Hips being compulsory for all properties since December, they are also likely to have a significant effect on 2008’s market.

“If consumers do not want to pay the Hips fee there could be a real shortage of properties and you then have the scenario of price rises,” sad Mr Jones.

“We’ve still got a massive amount of properties that came on to the market to beat Hips.

“At some point, those vendors are going to take their properties off the market, or the government will make Hips compulsory for them too.

“Whether interest rates will drop will also have an effect.

“We don’t know how it’s going to pan out yet but overall most agree it’s going to be fairly neutral.

“Any talk of a crash doesn’t ring true. After 25 years in the industry, the market feels pretty normal.”

“The future is inherently uncertain,” added Ms Earley.

“From a long-term perspective, a year of flat house prices will contribute more to the future stability of the market than a year of 10% inflation and ever worse affordability.

“Now may be a good time for price growth to pause for breath.”