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Marsh & Parsons London Property Market Overview - July 2009

Wed 01 Jul 2009

The difficulties faced by the London property market during 2008 continued into 2009 with all areas experiencing sizeable price corrections compared to a year ago. Average prices are now close to levels seen in 2006. Similarly transaction activity also fell significantly over the period with the level recorded in the first quarter of 2009 approximately 60% lower than the same period the previous year.

This performance reflects underlying economic conditions. Reflecting the situation in the international environment, growth in the UK economy deteriorated throughout much of 2008. This continued during the opening months of 2009 highlighted by the significant 2.4% reduction in the volume of output. Weaknesses in the economy are set to persist for some time and a return to positive rates of growth are not expected until at least 2010.

Some signs of improvement are filtering through in the residential market however suggesting that the market is close to bottoming out. In particular price decreases are showing signs of easing while activity levels are also beginning to improve. That said, it is likely that the recovery will be a slow process mirroring that of the economy as rising unemployment reinforces cautiousness among consumers while credit conditions are likely to remain limited for some time.

Economic Overview

The international credit crisis that evolved from weaknesses in the US property market, instigated a global economic recession with many of the worlds largest economies witnessing a deterioration in economic activity during 2008. In the UK, the volume of economic output began to contract during the second quarter of the year bringing the annual rate of economic growth for 2008 as a whole to a moderate 0.7%. This is compared to growth of 3.0% the previous year.

This decline continued during the first quarter of 2009 with figures from the Office for National Statistics indicating a sharp decrease of 2.4% in the volume of GDP. This represents the largest quarterly decline in almost three decades and is compared to a reduction of 1.8% in the previous three month period. On an annual basis, the volume of output decreased by 4.9% in quarter one.

A breakdown by sector reveals that the largest reduction during the three month period was in the construction sector which saw a 6.9% decrease in the volume of output. This brings the annual decrease to -13.2%. Output of production industries fell by 5.1% during the quarter while output of service industries declined by a more moderate 1.6%.

Almost all components of GDP decreased during the three month period. The exception was government expenditure which continued to expand during the quarter albeit at a modest rate of 0.2%. This brings the annual increase to 2.8%. The largest decrease was in investment expenditure, which fell by a significant 7.5% during the quarter, compared to a 1.2% decrease in the final quarter of 2008. This largely reflects a decline in expenditure on dwellings and business expenditure. The volume of exports also witnessed a considerable decline during the period at 6.9%, although this was matched by a 6.7% reduction in the volume of imports. Household expenditure, which represents the largest component of GDP declined by 1.3% in quarter one, bringing the annual change to -3.1%.

Reflecting the slower pace of economic activity, the annual rate of inflation has eased considerably since the beginning of the year to reach 1.8% in June according to latest figures from the Office for National Statistics. This is compared to the 3.0% rate recorded in January and is below the Bank of Englands target rate of 2.0%.

In response to the financial crisis and subsequent recession, the Bank of England adopted a rigorous policy of monetary easing in an attempt to boost the economy and maintain inflation close to the 2% target rate. This policy included large-scale asset purchasing to the value of 125-billion as well as a series of interest rate cuts bringing the base rate to an all time low of 0.5% in March of this year. This has declined from the most recent high of 5.75% in July 2007.

The recent performance of the UK economy reflects conditions in international markets with many of the worlds largest economies also experiencing negative growth rates. In particular, the US economy contracted by an annual rate of 5.5% during the first quarter of 2009 while output in the Euro Area economy declined by 4.9%.

London Property Market Activity

The London region witnessed considerable growth in average house prices towards the end of the 1990s and the early part of the current decade. Figures from the Land Registry reveal that growth was particularly robust during 1999 with average prices increasing by 23% during the twelve month period. The pace of inflation remained strong during the following three years standing at approximately 14% per annum in 2000 and 2001, and strengthening to almost 20% in 2002. Growth in average prices moderated somewhat between 2003 and 2005 before rising again in 2006 and 2007, with annual inflation reaching 11% and 14% respectively. Since early 2008 however, the international financial crisis and subsequent recession has impeded market activity. This is highlighted by the 13% decline in average house prices during the year.

Average prices for the London region peaked in January 2008 at 356,000 according to figures from the Land Registry. This was more than double the level recorded at the beginning of the decade. Since then average prices have declined steadily reaching approximately 295,300 in May of this year. This represents an annual decline of 16.1% and is equivalent to levels seen three years previously. Despite this large reduction, the market has shown some signs of improvement in recent months, with very modest increases in average prices recorded during March and April before falling again by 1.5% in May. This is similar to findings from other market indices.


Source: Land Registry

Not surprisingly transaction activity in the London region followed a similar trend to price inflation with the volume of sales particularly robust during 1999, 2002 and again in 2006. The level of transactions peaked in 2002 at 166,500 units according to figures from the Land Registry. In the subsequent period up to 2008 transaction levels ranged between 132,000 and 164,500 units before falling significantly in 2008 to approximately 78,000 units. This is less than half the level recorded the previous year. Sales during the first quarter of 2009 remained weak falling below the 10,000 threshold for the first time in over a decade. This represents a substantial 60% decrease on the same period the previous year.


Source: Land Registry

A local level analysis of some of the prime locations of London in which Marsh and Parson operates reveals some interesting results. Sales levels across all locations plummeted during 2008 according to figures from the Land Registry. This continued in the opening months of 2009. In particular prime areas in locations such as Brook Green, Clapham, Fulham, Holland Park and Mayfair saw the largest reductions in sales during the first quarter of 2009, ranging between 60% and 74%, compared to the same period in 2008.

These lower activity levels impeded average prices with most areas witnessing considerable reductions over the period. In many cases, prices have returned to levels recorded in early 2006. An examination of Land Registry figures reveals that most of the prime locations experienced relatively robust growth during 2007. The largest increases were recorded in Fulham, Mayfair and Pimlico where average prices in the final quarter of the year were between 29% and 33% greater than the same period the previous year. Barnes, Brook Green, Chelsea, Clapham and North Kensington also saw strong annual price inflation in the region of 16% to 20% in quarter four.

During 2008, most of the prime locations examined witnessed deteriorating prices. Generally reductions were more substantial in the latter half of the year with some areas including Balham, Barnes and Holland Park recording an annual decrease in excess of 20% in the final quarter of the year. The majority of locations recorded annual price reductions of less than 10%. The exception was Notting Hill which witnessed a substantial increase in average prices during the year. This reflects a relatively large number of high profile sales in the 1 to 2-million price bracket that may have distorted figures somewhat.

Chelsea, Holland Park, Kensington, Mayfair and Notting Hill all experienced substantial reductions in excess of 20% in average prices during the first quarter of 2009 compared to the same period in 2008.

An analysis of data collated by Marsh and Parsons during the second quarter of 2009 reveals that both Kensington and Notting Hill continue to achieve substantial prices with values in excess of 3-million recorded during the period. Chelsea, Fulham and Holland Park also saw significant prices achieved during the quarter ranging between 1.2 to 1.5-million while highs in the region of 2-million were recorded in Barnes, Battersea and Brook Green.

At the other end of the scale, locations that recorded prices below 250,000 during the three month period included Balham, Brook Green, Clapham and Fulham. Locations such as Barnes, Battersea, North Kensington, Notting Hill and Pimlico saw prices for properties at the lower end of the market in the region of 300,000 to 350,000 during the quarter.

Construction activity in the London region eased somewhat during 2008 with the total number of dwellings completing development totalling 19,650 for the twelve month period according to figures from the Department of Communities and Local Government. This is approximately 13% lower than the previous year. It is important to note however, that construction activity was particularly strong during the five year period 2003 to 2007 averaging an annual rate of almost 21,000 units. This is compared to the average annual rate of 15,000 units recorded during the 1990s. During the first quarter of 2009, a total of 4,750 units completed construction, moderately lower than the level recorded twelve months previously.

The level of starts also declined during 2008 with 17,480 units commencing construction. This is the lowest level seen since 2003 suggesting that the pace of development will decline further in the short term. That said, the level of starts during the first quarter of 2009 totalled 4,750 units, approximately 13% stronger than the same period in 2008.


Source: Department of Communities and Local Government

One factor that has impeded activity in the property market is the lack of availability of credit as a result of the international credit crisis. Seasonally adjusted figures from the Bank of England highlight that the total number of loan approvals for house purchase plunged during 2008 reaching approximately 32,600 in December compared to monthly levels in excess of 100,000 seen during much of 2007. This decline reflects difficulties faced by purchasers in securing loans coupled with lower demand as potential purchasers wait for further reductions in price.

The number of approvals decreased further in January 2009 to 32,300 before rising moderately in subsequent months to reach 43,400 in May. This remains significantly lower than levels recorded in previous years. In particular it is less than half the average monthly level of 107,000 recorded for the 2000 to 2007 period. That said it does show tentative signs of recovery in the residential market.


Source: Bank of England

Outlook for the future

The deceleration in economic growth is expected to continue during the remainder of the year with activity unlikely to pick up until mid 2010 according to forecasts from the OECD. As a result, the volume of GDP is forecast to decline by 4.3% in 2009 with 0% growth predicted for 2010.

This is despite the actions taken by the monetary policy committee to stabilise the economy. The Bank of England highlighted the risks to economic growth in their Quarterly Bulletin including rising savings rates among households and businesses as a result of continued uncertainty over the future, weak global demand and the prospect of credit conditions not improving as much as anticipated. The market is also vulnerable to shocks which could further slow the recovery process. Furthermore, with the economy growing below potential, this will lead to further increases in unemployment resulting in even greater uncertainty.

On the positive side however, the expansionary monetary and fiscal policies currently being pursued, coupled with the depreciation of Sterling should help stimulate economic growth. In its Inflation Report, the Bank of England pointed out that many financial institutions indicated that they intend to improve the availability of credit in the Banks Credit Conditions Survey. This will help boost activity in the residential market. That said, it will take some time before available credit will be restored to levels required to stabilise the market.

Given that international investors play such as substantial role in the prime London residential market, a recovery will largely depend on conditions in international markets. Growth in the US economy is expected to improve during the second half of 2009 resulting in an annual reduction of 2.8% for the year according to forecasts from the OECD. The pace of recovery in the Euro Area is predicted to be much slower however with growth not expected to improve until mid-2010. The volume of output for 2009 as a whole is estimated to decline by 4.8%.

It is likely that the recovery in the property market will similarly be prolonged reflecting continued cautiousness among prospective purchasers coupled with limited availability of credit. However key lending rates are likely to remain at current levels for some time which should help affordability in the market. The market has already shown signs of improvement in recent months with the level of properties under offer or exchanged during the second quarter of the year, well ahead of the same period the previous year according to figures collated by Marsh & Parsons.

In addition household projection figures published by the Office for National Statistics generate some interesting results. If recent demographic trends continue, the total number of households in the London region could increase by approximately 32,000 units per annum in the five year period to 2011, and by 36,000 units per annum in the subsequent five year period. This bodes well for the future of the market when compared to the average annual rate of new dwelling completions since 1990 of approximately 16,500 units.

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