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February 23, 2007    

Property statistics investors needs to watch

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by Brian Turner
Property statistics investors needs to watch

The housing market is booming - is continuing to boom - and with estate agents reporting invigorated increases for Jan 2007, there’s no slowdown in sight.

This should be an ideal time for property investment - while house prices continue to rise, there are profits to be made.

And why shouldn’t they keep rising? After all, it’s commonly reported that there’s a shortage of housing.

But once you cut through the generic figures, an interesting picture begins to emerge.

Fixing the property market

A key problem with property inflation prices reported by estate agencies is that they are generally reporting on asking prices. This is a key point to realise, because asking price isn’t always selling price.

For example, in a slowing market, estate agencies may still recommend property owners keep in mind that a buyer may expect a reduction in the actual selling price. The presumption here is that a general market price will be offered with the expectation of loss. However, all too often I’m seeing estate agents compensate for this by actually accelerating the asking price.

In that scenario, a house that would normally go on the market for a reasonable £200,000 is being offered for £220,000, on the grounds that £20,000 can then be knocked off the price when a reduction is required - leaving the original asking price on the table.

The estate agency wins out because if the property is knocked down to the reasonable price, they still get their nice fee, the seller makes their return, and the buyer thinks they’ve got a good deal.

However, if a more naive buyer pays up the £220,000, the estate agency could be in a position to claim a higher fee, the buyer is happy on increasing their investment, and the buyer is none the wiser.

The result is that property inflation is still reported as booming by estate agencies - after all, they can prove that asking prices are still rising faster than inflation - but what they aren’t telling is that it may well be themselves fixing those prices in at least some instances.

This isn’t to say that estate agencies are all utterly unscrupulous - but there remains ample room to play the market.

And the consequence is that when the surveyors come around for the mortgage companies, their main reference point for the value of these properties are the prices estate agencies pushed for in the first place - which reinforces estate agency asking prices in a positive feedback cycle - leaving prices spiralling up.

So while there remains strong demand there’s a snowball effect in prices. And because there’s a snowball effect in prices investors step in to strengthen demand.

The actual value of properties

And that’s the key point to underline, because property investment has been one of the single biggest growth engines in the UK property market over the past five years.

Buy to let mortgages now account for almost 1 in 10 of all property sales, and there are over a quarter million second homes purchased in the UK.

When we look at the figures from the Land Registry - the department which collates figures on actual selling prices - we find that the biggest market growth has been in the £100,000 - £200,000 range.

But what they also show is that there’s a huge variation in property inflation not simply across the UK, but also by house type.

For example, property areas with a lot of lower priced housing (flats and ex-council housing) are seeing the most activity, and therefore the biggest price rises. But these are relative price rises, and it’s important to realise in these percentiles that a 15% rise in property inflation even in a single area does not apply to all properties, and actually varies significantly according to property type.

For example, the picture is interesting when you compare the increase in Q4 selling prices for 2005 and 2006:

Growth by property:

Detached - 6.78%
Semi-det.- 7.42%
Terraced - 9.23%
Flat/mas.- 9.07%
ALL prop.- 8.49%

The immediate figure that strikes out here is that the real growth in the market is borne by terraced properties and flats/maisonettes.

Another striking figure is that property sale prices are growing slowest in detached properties - almost a full 2% below the overall average, and almost 2.5% below growth in terraced property inflation.

However, again, this is a generic average across the UK - when you actually analyse the LR figures for detached houses by region, you find that the big growtn areas for inflation are the South of England - London, South East, and South West. And the actual growth in detached houses north of London actually averages 5.1%.

That’s an important figure to note - with the base interest rates from the Bank of England now at 5.25%, that means most people now buying a detached house outside the South of England are already losing money.

It also tells us that if estate agents apply the overall growth in prices to evaluating detached homes, they are grossly over-inflated the property price.

The overall picture

So what does that mean for UK property investors?

Firstly, local variations absolutely need to be taken into account, and while percentile growth figures may look appealing, you need to be able to look past these at actual figures. Low-value housing is more likely to see biggest inflationary growth, simply because it’s more affordable.

Property type also requires serious attention. At present, you will probably find £200,000 is much better spent on a flat in London than a detached house in the north of England.

On top of all this, though, the complex state of the UK housing market needs to be taken into account.

Economic advisory bodies from the IMF to European Commission have already expressed concern that the UK property market is over-priced.

But supply pressures remain, from different areas.

For example, the unfortunate trend of family break-ups sees family units increasingly spread over 2 or more housing units. Plus general population growth adds to the overall pressure for housing. Additionally, the government’s introduction of SIPPs & REITS means that property investment is being additionally promoted, especially in lieu of otherwise failing pension schemes.

The overall picture is one that is too complex to rely on too simple generalisations - not if you’re serious about property investment. But the one thing that stands out most is that the way British society continues to develop, in the absense of dramatic influences, demand will continue to outstrip supply for the near future.

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