Historically, our housing market has been supported from beneath. First-time buyers entering the market have provided the stimulus for others to move on up the ladder. I don’t believe this is the case any longer as market dynamics have changed over the past few years, the growth in private wealth, as well as in the numbers of foreign buyers (who don’t have anything to sell and therefore ‘absorb’ housing stock) and bonus- or cash-rich City folk, has meant the stimulus is now provided from the top of the market.
Scarcity is a more prevailing factor than affordability at this end. There is a finite supply of genuinely prime property, and increasing numbers of people can afford to buy it many of whom aspire to live in the same types of properties (and we can’t build any more garden squares in Notting Hill or Georgian rectories in Oxfordshire). In very basic terms, this is a recipe for price inflation; in similar fashion to the market for fine art and antiques, it is the rare and exceptional commodities which out-perform market trend over the long term.
The potency at the top end of the housing market has been a result of strength in both global and UK eco-nomies, as well as the key role London plays as a financial centre. Worries about interest rates and the resulting pressure on affordability are hitting home in the mainstream market; however, the top end has been driven by an entirely different set of factors.
The key reason why the market for prime property continues to significantly outperform the rest of the market is the growth in the number of high-net-worth individuals combined with the attraction of the UK to non-domiciled taxpayers. The numbers provide some perspective: for properties in excess of £2 million, Savills’ research department reports annual increases of 29% in London and 15.1% in the country; the Halifax Index shows 6% for the market as a whole and the Nationwide states 9.9%. Savills also reported a staggering 48% growth for homes in excess of £5 million, which clearly demonstrates exactly how polarised the market has become. Today’s market is being pulled from the top as opposed to being pushed from the bottom.
This equity- (cash-) fuelled price inflation at the top means that demand spills out and down through lower-priced markets in other areas. There is a time lag involved, but at Garrington, we are seeing a cascade effect, as central or prime sellers spread their profits, and as less affluent households search for better affordability in less well-established areas. Although the supply/demand imbalance remains the catalyst for the market, five interest rate rises within 12 months will take their toll on mortgage-led sectors. I expect rate rises to have dif-ferent impacts in different price bands the most valuable properties being the most insulated. Although it does have to be said that the problem is set to become a sharper one over the next year, when some two million homeowners who took out two-year fixed-rate deals will need to take out new mortgages at higher rates.
There is no doubt that the majority of this year’s growth will have taken place in the first six months of the year; some of the steam has already come out of the market, but I do expect prices to continue on an upward path. There are bound to be some short-term concerns as a result of the global credit crunch, and, as a buying agent, I anticipate having fewer properties to choose from over the next couple of months. However, there will also be less competition from other would-be purchasers, and so it should be possible to adopt a tougher stance at the negotiating table.
My prediction is that demand will continue to outstrip supply buyers will be both price sensitive and wary, but they will be out there in the market and prepared to pay for quality products (where and when they can find them). As the top of the market continues to be stretched, there will be an elongation of property price bands, which will result in greater scope to haggle over prices as valuing becomes even more of an art than a science.
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