A FEW weeks ago I argued that the current housing market offers a rare opportunity for buyers because their competition is thin on the ground. Since then the economic indicators have worsened with the anticipation of lower economic growth for 2008 and 2009, higher short-term inflation levels and increased unemployment.
You might assume I've therefore had to eat my words, but in fact I believe it's an even better buying opportunity now. This is because the underlying property market has not changed but rather the current supply-demand ratios have been knocked out of
balance by exceptional factors. House prices in parts of England and Wales, and even in some areas of Scotland, are being shown to fall and the threat of a fall in house prices has caused a temporary fall in demand for property.
However, this is not a fall in real demand but rather a short-term suppression based on concern about price levels. The real demand for housing comes from the needs of people to secure a home for themselves and their families. That demand does not change, although it can be suppressed as people hold back from deciding to buy. In the medium to long term, however, the demand for housing is what will re-correct the market and so to buy now when prices are static and when competing purchasers are staying away makes sense.
One reason would-be buyers aren't buying is the risk that prices may fall further. They might. In Edinburgh, house prices have continued to rise but elsewhere they are falling and no-one knows exactly when matters will bottom out. However, a falling market offers more choice to buyers able to set down their own conditions in an environment when some sellers will be prepared to toe the line. If a property is valued at £200,000, there is no obligation to offer that. If you secure an agreement at £185,000 then what you have done is factored in a price fall of 7.5 per cent. If the market doesn't fall you have secured a discount, because any fall below the purchase price is likely to be short-lived and soon offset by longer-term increases. Last week, the Centre for Economic and Business Research (CEBR) said that, as a result of the slowdown in new house building, there is likely to be a significant push on house prices of around 30 per cent between 2009 and 2012. It is ironic that the credit crunch is itself likely to be the indirect cause of another property boom as it has cut off the supply of new houses which the market so badly needs in the long term.
The CEBR added that price rises due to supply constraints do not factor in the additional effect of the falls in interest rates that it predicts for 2009 as the short-term inflation spike retreats. When potential buyers tune into the fact that they have between now and late 2009 to buy before the market moves forward again, it is fairly obvious what is likely to happen to both activity and price levels.
The other factor inhibiting buyers is the perception that there are no mortgages available. True, there are no 100 per cent mortgages at the moment, but there are 95 per cent deals. It is also true that rates are higher than they have been in the last three or four years. However, mortgage rates are still relatively low, still cheaper than equivalent rental rates and are likely to move lower in 2009.
The event we called the "credit crunch" is over. The liquidity issues have to some extent been resolved and confidence between banks is now better than it was. Although the banks are saying that trading conditions will remain difficult for the next couple of years, this should be viewed as a statement from their perspective and not necessarily from the perspective of a borrower. Indeed, difficult trading conditions for the banks may be very welcome from a borrower's point of view if it prompts them to resume competing on price to secure market share.
So those waiting for house prices to rise will have missed what is likely to be a very rare opportunity to benefit from a market in short-term over-supply. Once the current backlog of properties is cleared, the market will return to its natural long-term position, where housing supply constantly fails to match housing demand and where equilibrium can only ever be achieved by an upward shift on prices.
• Jason Scott is a partner in Warners solicitors and estate agents.
The full article contains 782 words and appears in The Scotsman newspaper.
