King Sturge property predictions for residential market 2008

The market faces a slowdown with forward indicators such as new buyer enquiries and mortgage approvals weakening recently. The credit squeeze will especially affect first-time buyer and investor demand, exacerbating affordability constraints. Nevertheless, investor activity will be supported by a consolidation in tenant demand in the face of weakening first-time buyer activity. Moreover, investors with significant cash reserves may find opportunities to acquire stock at more favourable yield levels than in 2007.

A ‘payment shock’ affecting 1.4 million UK households whose cheaper, fixed rate mortgages expire in 2008 presents significant market risk. We do not, however, expect the UK market to be as adversely affected as the US, primarily because this country did not experience such widespread easing in underwriting criteria to the sub-prime sector.

The amount of unsold stock on the market will remain relatively low as buoyant employment levels limit the number of forced sellers. However, prospective buyers will be increasingly unwilling to meet vendors’ price expectations, resulting in lower transaction levels than those seen in the past 2 years.

Pricing

We forecast national house price growth of 3% in 2008, matching the rate seen in 2005. London is expected to produce the strongest regional growth in Britain, at 5%, followed by Scotland. Growth in the Midlands, North and Wales is expected to be weaker at 1 to 1.5%. (chart attached)

Generally, new apartment price growth will under-perform the overall UK market, though in London, price growth should at least match the mainstream market. There is an increasing need for developers to differentiate apartment stock as the risk of localised over-supply grows in many cities.

In 2008, Prime Central London price growth is forecast to slow significantly from last year, when price growth exceeded 30%. In 2008, we anticipate a price rise of 6% as uncertainty over City bonuses will constrain buyer demand, especially at the lower (sub-£4 million) end of the market.

Supply

The supply of new-build stock is expected to remain tight as developers’ sales expectations have declined. The impetus to housing supply from increasing density levels will weaken and with no accompanying rise in planning permissions, completion levels will be lower than last year. There will, therefore, be no progress towards achieving the government’s medium term housing target of 240,000 homes per annum.

Furthermore, price growth is expected to be at around the rate of build cost increases over the next 5 years, in contrast to virtually the whole of the past decade when price growth substantially exceeded costs. As such, the viability of many schemes in the future may be threatened.

We do not expect to see a quick fix to speed up the planning system or in terms of taking any risk out of securing planning permission; though this may change over the next 3 years as a consequence of recent Government initiatives. Regarding affordable housing, the pressure on capital markets is always a buying opportunity for the larger and more sophisticated Housing Associations given their very strong credit ratings.