Property prices will fall in 2010

Mortgage lending is up but outlook uncertain

Commercial property shows capital growth

Raised confidence in prime London market

Repossessions and arrears down in Q2

A report published recently by Ernst & Young ITEM Club has predicted that at the start of next year (2010), residential property prices will again fall as the market experiences a double-dip despite current house indices indicating slight price increases.

It believes that it will take until 2014 for property prices to return to the peak level they were at in 2007.

It also reports that the recent rises are more to do with the lack of availability of stock and the small number of cash-rich buyers. First time buyers are also not returning in significant numbers due to the high deposits required by lenders and the limited choice of mortgages available.

Hetal Mehta, an ITEM advisor, said: “A small number of cash-rich buyers have supported prices, but the supply of these funds is limited, which means prices are likely to dip again in the first half of next year.”

However the report also went on to state that it expects prices to rise again towards the end of the year and increase by +2.8%.

Mortgage lending is up but outlook uncertain

A recent press release from the Council of Mortgage Lenders (CML) on current UK Lending stated that in July there was a +19% increase on residential property loans compared to the previous year which is the first significant increase since early 2007.

The figures from the CML showed that house purchases accounted for 56,000 loans totalling £7.5bn. This was a +24% increase on June 2009 and a +19% improvement on July 2008.

Whilst the majority of lending was focused on home movers and remortgages, there was an +18% increase in loans to first-time buyers in comparison to the previous month, and this was a +22% increase from July 2008.

Paul Samter, a CML economist, said: “ There is certainly concrete evidence that lending for house purchase is increasing, but t he overall lending picture is likely to stay relatively subdued for some time, especially as the wider economy is far from robust as yet.”

Commercial property shows capital growth

According to the Investment Property Databank (IPD), UK commercial property values rose +0.2% in August which is the first positive growth seen in 26 months, but rents and occupancy continued to decline.

Industrial properties posted the largest monthly change in values, rebounding from a -0.24% fall in July to a +0.26% rise in August, while retail properties showed the strongest capital growth at +0.37%. The value of offices continued to fall slightly in August, however, down by -0.03%.

Rents for offices, retail and industrial fell by -0.48% on average although this was a slight improvement of +1% on July’s figure.

Vacancy rate also rose in August to a new record high of 12.3% after falling in July. This was led by a spike in vacancies in the industrial sector of +1.2% to 18.2%.

Initial yields for all property sectors decreased to 7.86% on average, following a compression in yields for both the retail and industrial sectors to 7.53% and 8.18% respectively.

Ian Cullen, co-founding director at IPD, said: “The much-anticipated return to capital growth in UK commercial property comes at a time when the finance sector is marking a very painful anniversary - the collapse of Lehman’s.

“Since that profound shock, commercial property has delivered record losses, but has at least traced a relatively stable path towards this first tiny sign of recovery - in stark contrast with the much more violent oscillations of the equity and bond markets.”

Raised confidence in prime London market

A recent report by Knight Frank on London’s residential property market reported that sales volumes had increased by +90% since the start of the year with prime central London property rising by +6.4% since March 2009.

This has helped to raise confidence in this sector of the property market after 18 months of particularly terrible market conditions. The report also points out that as the recovery is starting from a very low base the industry should not be complacent.

However with the low numbers of properties actually available, demand still exceeds supply ‘ the key factors are low volumes of available property, which at the beginning of September were already -34% below the level seen at the same time last year ’, according to the report.

Despite the increased sales volumes, prices for London’s prime properties are still someway short of the prices they achieved at the peak of the market, indicating that they have some way to go before they reach that again. The report said: ‘ Average prices for London’s best properties are still -19% below the level they hit in March 2008.’

Repossessions and arrears down in Q2

The Financial Services Authority’s (FSA) latest figures on repossessions showed that the number of cases fell in Q2 2009 to 13,610 from 14,884 in Q1.

Whilst this was -9% lower than the previous quarter it was +23% higher than the same quarter in 2008.

The FSA stated the change could be as a result of changes in the courts administration processes (the Ministry of Justice’s new Pre-Action Protocol is likely to delay a case proceeding to possession) but also likely reflects lenders’ more restrained approach in conjunction with lower interest rates.

Sales of repossessed homes meanwhile have been increasing rapidly since Q2 2008 despite previously not having showed any change from roughly 6,000 a quarter since the start of 2007.

New arrears cases meanwhile have fallen for a second quarter in succession from 60,000 to 51,000 which is a -14% drop. This is now below the previous 18 months average of 54,000 up to mid 2008.

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