It would be hard to be ignorant of the increasingly negative stream of news on the housing market that has been trickling out throughout the second quarter, and, as conditions have deteriorated, many housing-market commentators have revised their forecasts downwards. Of course, it’s impossible to accurately predict what will happen in the short term in any market, and we should be sceptical of people who claim to be able to do so. However, the consensus is that, for the mainstream market at least, there are going to be very few properties gaining value within the next 18 months.

The situation has intensified considerably over the past few months. The mortgage market (or lack of it) is playing a key role in this, and will almost certainly continue to do so. Mortgage-approval levels have declined significantly falling 67% since the peak they reached 18 months ago. They are now at the lowest levels since the Bank of England started collecting the data. Demand for mortgages is far exceeding the supply of products available, and, with the average fixed rate now standing at more than 7%, this will prove painful for those households remortgaging now, or having to in the next few months. Although many households will have built up decent levels of equity during the boom years, which will now help to combat negative equity, the mortgage market continues to pose a significant threat. The prime market hasn’t escaped the downturn. According to Savills’ prime indices, values fell 5.5% over the second quarter of this year, and in prime central London, values have actually fallen more sharply than in the mainstream market.

The one sector that continues to show growth is the super-prime London market (£5 million+), which has shown growth of 3% in the second quarter. Although the mortgage drought doesn’t directly affect the high-net-worth individuals who continue to want a London address (in areas where supply is often tight), prolonged unease regarding economic strength and the direction of the housing market has started to make some think twice about transacting. The economic backdrop is worsening as inflation is rapidly becoming a cause for international concern. In the UK, CPI inflation reached 3.3% in May, forcing the Bank of England to write a letter of explanation to the Chancellor for only the second time since the Bank of England was granted independence in 1997. Inflation isn’t expected to decline for some time.

In fact, the Bank’s own projections show inflation not dropping back into the target range until early next year. At the same time, economic growth has slowed to below trend, and most commentators are expecting only fairly modest growth next year as well. This has a direct impact on interest rates, and it now appears unlikely that there will be a cut in interest rates before the end of the year. As the economic backdrop deteriorates and the press constantly highlights the demise of the property sector, confidence is evaporating. This has contributed towards a huge decline in turnover something that estate agents and house builders are feeling acutely at the moment. Only the best properties are selling in this market, and motivated sellers are having to be realistic when setting their asking prices.

The silver lining (if it can be called that) is that the rental market is a direct beneficiary of the weak sales market and there has been a marked increase in demand from tenants. This is particularly the case in the mainstream market, as first-time buyers are unable to access mortgage finance and others choose to sell up and rent as the market settles down. Much depends on the balance and stock selection of an investment portfolio, but investors who own the right units in the right places have been enjoying better yields. In some areas of London and the South, annual rent increases of 15% have been achieved.

As previously suggested in our monthly commentary, the current scenario will generate opportunities for cash-rich people looking for a primary residence, as well as for investment buyers seeking distressed sales. ‘Vulture fund’ is a term cropping up more frequently, although I doubt we’ll sink to the depths seen in the US, where tour buses are apparently operating to show people where all the repossessed houses are. For more information about Garrington property search, visit www.garrington.co.uk