In broad terms, the property market of any country can be divided into the housing market and the commercial property market.  The housing market, while separate from commercial property, will clearly have an effect on commercial property prices as consumer spending – confidence will transfer through into the retail market. 

The Chancellor of the United Kingdom Mr. Gordon Brown and the Governor of the Bank of England are in a heated debate about the future of house prices.  Property has often lead the way in the perception of a boom and bust economy with the most recent crash occurring in the early 1990's at a time of high interest rates with many people getting into the mortgage trap whereby following a fall in the price of property, the mortgage they had was greater than the property's value.

Clearly, in Summer 2004 with a general election on the horizon it cannot be politically expedient to see a house price collapse.  What I think both the government and the Bank of England wish to see is a levelling off or dampening of what has become a worrying factor in an otherwise reasonably stable economy.

The media have been talking about a property crash for as long as can be remembered and I think it is accepted by all professionals, journalists and commentators that there needs to be some adjustment in the way in which house prices have continued to soar.  Opinions range from a serious collapse to a levelling off of growth.

One must recognise that unlike many of our European neighbours we have a population of a similar size if not greater than France occupying a land mass of less than one fifth of it's territory.  There is therefore, always, greater pressure on land as a whole in the UK than there would be in other countries.  This is particularly so in the South and South East where house prices have historically sped ahead of other indicators showing economic growth.  In the past five years the Midlands and the North have seen an increase in house prices in certain targeted areas where demand outstrips supply.  In addition, with the increase in capital values, there has been a further growth in buy-to-let where people purchase apartments for letting.  With low interests rates, mortgage companies have been offering potential borrowers five to six times earnings rather than the more conventional three times earnings which used to be the bench mark.

The increase in house prices has made it very difficult for many first time buyers to get onto the housing ladder.  In Central London it will now cost approximately £200,000 Sterling to purchase a studio or one bedroom flat.  This makes it extremely difficult for state funded professionals, i.e. Doctors, Nurses, Teachers to afford to purchase in the area in which they work.  There are various government schemes being put into place to help combat this with key worker housing etc.

At the time of the last property crash consumer spending collapsed at approximately the same time.  The confidence of the consumer as prodded and massaged by the media will determine the way in which the property market goes.

The way in which consumers spend is of great importance.  There are two factors that have been monitored in relation to the percentage of a persons income that is needed to service their debt.  These relate in particular to interest rates and Withdrawal of Mortgage Equity (MEW).  Interest rates have been falling for a considerable period and it is only in the past four to six months that they have increased to 4 ¾ %, the latest increase being on the 4th August 2004.  It is expected that interest rates will rise to approximately 5¼ % by the end of the year.  The Bank of England figures show that interest and regular repayments accounted for around 20% of the income of the medium new borrower in 2003 / 04 compared with over 30% in 1990.  This would suggest a slow down rather than a collapse is more likely.

The second indication is how much money people are taking out of their equity to spend on non-property related consumption.  In 2003 this was estimated at 8.3% of household income.  However, this has been estimated to include approximately 40% of people who have sold property following an inheritance and then deposited the proceeds rather than using them as immediate consumers.

The general liberal consensus is that we are not in the same position poised on the edge of a precipice ready for a cataclysmic event as we were in the late eighties and early nineties at the time of the last property crash.  It is to be hoped that upon the fall of house prices we will see a levelling off and a more realistic growth as part of the economy rather than a complete collapse.  In any event, historically investments in property have been safer and more productive than investments in other aspects of the economy. 

Our general advice would be that the purchase of a property for living or income rather than a short-term gain, which can be held for a period of at least 3-5 years, should not lose money.

The last word, when looking at any property must be the three givens, those matters of concern when deciding whether to purchase a property (excluding price and condition) to which all properties are subject, is location, location, location.

Simon S. Aronsohn

Law Firm Ltd
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