The current view on the UK market

• By: Ready2invest: Jonty Crossick
• On: 01/09/2009 11:33:19
• In: Economics
• Comments: 0

What is happening to the UK market? Are we at the bottom of the market? Are we on the turn? Will there be a major recovery? Is there another boom around the corner? Or are we headed for a further dip? To work this out we need to look at the current demand/supply relationship, the short term factors. Then we need to take a look at the longer term drivers. This should give us an idea as to where we are headed.

If the property market was a normal market, it would have fallen a lot further than it has. However, the market is sensitive to interest rates and it is sticky. If you are selling fish then you need to clear the stock before deterioration erodes the value your stock. This is not so for property. Families can still eat and function in negative equity and ride the storm out. Investors can keep paying the mortgage and wait for sunnier times. In other words, if there is a long term belief in the UK economy then owners will not sell when prices dip. They will hold on to their castles and ride out the troubles The only thing that makes the castle vulnerable to attack is too much borrowing. And life has been sweet to owners recently because interest rates are low enough that cashflow has been manageable for many. This inherent stickiness in a market like the UK can ensure a floor under prices as stock dries and demand and supply start to even out again.

Not only is the supply side sticky but the industry responds very quickly to a change in fortunes. In 2008 there were over 200,000 house starts in this country, public and private. In 2009, the estimate is a slither over 100,000. Again this corrects the short-term demand/supply problem. Under market value deals in the south-east are getting harder to find. 30% is shrinking to 15% and less. As the stock clears, market value is supported and the market either turns or at least flatlines at its nadir. You will see this rippling out across the country over the next two years as under market value deals become less competitive over time and across the nation.

While I am bullish about the market having hit bottom, I am not so optimistic about a return to boom times. Perhaps this is good news because we dont want another roller coaster. At least not for another ten years. How could our hearts cope with another one? We need some steady activity without the constant adrenalin and frenzy. Longer term, the property market is driven by economic and demographic factors on the one hand and financial variables. It will take several years for unemployment to peak and the drop. There is a lot of emigration right now as many Eastern Europeans (particularly Poles) return home. And the banks need at least two years to restore their balance sheets and start to lend more freely and aggressively again.

In summary, I say we have reached bottom and it is a good time to buy. But the market will recover modestly for the next 2-3 years with property growing but not robustly. By 2012, however, with the financial sector cleaned, jobs being created again and the economy back on a decent track, expect the start of another house bull run. The main threat to this is if a new Conservative government applies a fiscal pill to the economy that is too harsh. The major challenge for any new government is how to slash spending without killing the recovery. The finances need to be put back on a decent footing slowly and surely over time. There is some coincidence of timing. The Olympics should herald the return to a more prosperous era again, albeit without more down-to-earthness compared to the unhinged noughties.