The Fall: who’s odds-on to stay in the saddle?
The Year Ahead by Hugh Obbard 18/08/2023

Picking up the racing theme from our early Summer update, the dash into Autumn/Fall is a time to assess the runners and riders. Who is odds-on to stay in the saddle? And who may find themselves thrown off-course?

The hurdles to be navigated are many and ominous. A cost-of-living crisis, with inflation remaining stubbornly high. Interest rates (still potentially rising) that remain the single biggest influence on the property market. Then there is the non-stop political drama, with an election looming ever closer.

From a property standpoint, the impact will be Darwinian in its separation of weak from strong. The former tend to be those entirely reliant on high loan-to-value mortgages and who manage household budgets from month to month while having little or no savings to fall back on. The latter tend to be cash-rich and very often use debt as an efficient tool. In the middle are those whose mortgage borrowing absorbs a meaningful slice of their income, often on top of large school fees, but who can draw on reserves and investments to see themselves through turbulent periods.

As we enter Q3 2023 we are clearly seeing the broader UK housing market adjusting, down 5.3% as of end August, according to Nationwide. Meanwhile PCL is showing growth closer to 2%.

30-year perspective

Next year will be Obbard’s 30th anniversary, and I am a great believer in the past teaching us about the future. While the world has changed beyond recognition in many ways since 1994, it remains surprisingly similar in others.Back then I was returning from a five-year stint in South-East Asia – working in property markets from Hong Kong to Jakarta. When I’d left London in 1989 Base rates were at 13.75%, with clear signs of a property crash in the making. When I arrived back in the UK the properties I had been dealing with five years earlier, in places such as Belgravia and Chelsea, had held their value, so it was easy to pick up where I had left off. Properties in the areas where many of my friends and I had lived (Battersea in my case) were down 20%. Canary Wharf and the docklands regeneration plan, the pin-up for late-Eighties speculation, was down 40% with its original developer bankrupt as the commercial sector had tanked.

Some very simple and obvious lessons could be learned. Those for whom debt was a choice were shielded to a degree from fast-rising interest rates; those for whom debt was a necessity were hard-hit, and those who speculated on promises of future riches in immature sectors were close to being wiped out.

The decades since can be split into three distinct market phases, where we would pick three major influences for each.

1994-2004: Cyclical recovery

As interest rates normalised the market recovered from its newly adjusted levels. Yields were strong, particularly in Docklands, which saw an influx of international investors at the time, notably from SE Asia, as the tiger economies roared ahead.

Obbard’s three key influences on the market:

– The advent of large City bonuses which could typically well exceed base salaries. This helped buyers rapidly accumulate the large cash deposits that would have previously taken many years to accumulate.

– The intergenerational transfer of equity from grandparents/parents that started to accelerate as debt-free homes were passed on to the Baby Boomer generation.

– The advent of the buy-to-let loan in the latter Nineties that opened up property investment to the man in the street.

Over this period the prime London market rose by an average of around 12% pa, against a UK national house price index that rose by 7% pa over the period.

Base rates started around 5.13% and ended at 4.75%, reflecting a period of stability. GDP was 3.5% in 1994 and 2.3% in 2004 having witnessed the bursting of the dotcom bubble.

Cheap money for all

In the summer of 2003 base rates were hailed as being their lowest for 30 years at 3.5%. On the back of this we had the self-assessment mortgage, the 100% LTV and a deregulated lending market with extreme competition. What could possibly go wrong? Following the inevitable crash in 2008, the Government set about supporting the wider economy through its own stimulus measures.

Base rates were down to 2% at the end of 2008 and 0.5% within 4 years (reaching an ultimate low of 0.1% in 2020), where they remained until the end of 2014.

By 2014, GDP was a healthy 3.2% but the Government continued to print money and launch initiatives aimed at new buyers. Help-to-buy was aimed to support first-timers and housebuilders; the latter certainly made hay. However, George Osborne could see the looming house price bubble he was creating in concert with rock-bottom interest rates and set about both deterring second homeowners and buy-to-let investors while penalising overseas and corporate buyers. Stamp Duty, which had been a universal 1% when I left the UK for Hong Kong in 1989, was now as high as 15% in some cases.

Obbard’s three key influences on the market:

– The global financial crisis of 2008.

– Rock-bottom interest rates and the interest-only loan.

– Government intervention designed to shape market forces.

Over this period the prime London market rose by around 8% year on year, while the UK national house price index rose 3.9% pa.

2014 – 2024 Political failures

As if a government endlessly printing money and artificially stimulating one part of the housing market while suppressing another wasn’t bad enough, the geo-political situation was worse. Weak and wanting western leaders gave rise to autocrats. And so our third decade ends with an appalling war on the European continent and multiple coups overthrowing established governments in Africa. Meanwhile, China amplifies its threat to invade Taiwan while – thanks to its own internal economic woes – threatening to export a drag on the wider global economy. And as we watch the ever-increasing power of ‘strongman’ leaders in countries with very questionable ideas on human rights and addressing environmental issues, the ideals of globalisation continue in reverse gear.

The fortunes of the prime London market have been very muted over this period. With capital growth fairly negligible and inflation over the period at around an average 3% pa (the last 18 months having pushed this up from the longer-term trend that was closer to 2%), ownership of prime London residential property has however just about performed one of its primary tasks – that of being a store of wealth.

The past two years have seen something of a sea-change. On the one hand there has been the extraordinary rise in rents. This is reflected nationally, but in prime London, rents are up some 28% above pre-pandemic levels. Although there are signs the pressure on rents is easing, demand still far outstrips supply, particularly with landlords exiting in large numbers and individual buy-to-let purchases actively discouraged.

The other sector of note is the super-prime market, which has seen some records achieved in the past two years. Whether it be hitting £7/8,000 per sq ft in some of the high-profile new super-prime schemes in Mayfair, or individual one-off residences selling for tens of millions, London seems to still pull in the biggest spenders.

Back on planet Earth, the market is sensitive to general sentiment. For many the rapid rise of their mortgage payments is extremely unwelcome but manageable as long as the promise of light at the end of the tunnel (rates falling back to a normalised 3% or thereabouts), is realised within the next couple of years or so. Overseas buyers still look at London property as a safe haven for wealth, despite the high cost of entry, and many will include the currency play in their calculations.

I would add that one more recent key influence – particularly on the mid- to upper-end of the domestic market – is the sharp rise in joint buyers with two salaries on a similar level. Advances in salary equality and the reality that both parties in a relationship will be in full-time work means that just as the era of ultra-low interest rates improved affordability, so too has the age of the dual-income professional household. And thus perhaps the oft-cited ‘price-to-earnings’ ratio is becoming even less relevant in its current form.

However, this in itself will be partly countered by a more fundamental societal shift. As the Baby Boomer generation – with its substantial inherited wealth – begins to disappear, succeeding generations will inevitably find themselves carrying large debts throughout their lifetimes; HSBC’s recently announced 40-year mortgage offer is evidence of this.

Obbard’s three key influences over this period:

– Politics (from Osborne to Corbyn to Brexit to Truss) and continued Government intervention in the property market

– Interest rates starting at rock bottom and ending on a 30-year high at 5.25% (as I write). Thanks, in the main, to the shocks of Covid and Ukraine.

– The role of dual incomes and income equality.

The prime London market has risen by less than 2% year on year since 2014. The UK national house price index meanwhile has risen closer to 5% pa to date.

Inflation remains high at 6.8% (as I write) and GDP for 2023 is expected to be a paltry 0.3%. Base rates may yet rise further from their current 5.25%

When I established Hugh Obbard & Associates in a basement in Pimlico, it was just myself, my wife helping out on an inkpad, a loose arrangement with a local firm of surveyors – and a firm belief that clients should have dedicated representation and clear, informed advice in all disciplines when entering the prime London property market. Today, Obbard has grown and evolved into an integrated, full-service property consultancy. We have in-house Design & Build and Asset Management capabilities, in addition to Acquisition & Sales, that now act for clients around the globe (41 countries and counting). Here’s to the next 30 years!

The Year Ahead by Hugh Obbard 18/08/2023
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