What Does The Future Hold For House Prices?

22nd May 2009

Perhaps we should ask the art world. Damien Hirst's latest show is called Requiem. But unlike his debut, it coincides with a rebirth not a collapse in property values, according to Yolande Barnes, head of research at the property company Savills

In 1988, with a prescience that only the Young British Artists (YBAs) could manage, their first exhibition was staged in an old warehouse in Docklands in East London. It was called Freeze and was shown in the last gasps of the property boom. In the autumn, the big chill began.

It was the extreme location of Freeze that was then considered every bit as shocking and edgy as some of the installations. Standing in the same place today, in the shadow of a modern City, it is hard to imagine just how inaccessible and ‘way out’ this part of London was once considered to be. The outrageous can become mainstream very quickly both in art and in the property market. During every boom, the tide of what is considered acceptable, what is considered a good or ‘prime’ location moves out further from core to periphery. In every bust, it moves back in again, but never as far as the previous shoreline.

A good example of how far households in the late 1980s were willing to go to get into the housing market was the advent of long-distance commuting to London. Yuppies, the defining marketing term of that decade, became ‘DONCys’ (a term coined to describe long-distance commuters to London from Doncaster after the electrification of the East Coast mainline).

Homeowners (and it was always owners, as the private rented sector was virtually non-existent) also became willing to occupy new housing on vast estates in less accessible locations. One scandal in the downturn was that property values on these estates full of homogenous, so-called ‘executive’ homes were plummeting at rates much faster than the rest of the market. The fundamentals of quality and location were left sadly exposed when the emperor's new clothes were stripped away by recession. The notorious Bradley Stoke, outside Bristol, was a case in point and became known as ‘Sadly Broke’.

Now, 21 years after Freeze, the ‘Cool Britannia’ era is over and the cycle has turned yet again. Britpop, it turns out, provided the soundtrack to one of the biggest booms and busts in history. With prices falling in over-hyped buy-to-let flat-factories across the country, are we set for a repeat?

There are two key differences between the downturns that significantly alter the way the property market and housebuilding industry will look and behave in future. There is also one important similarity that means we almost certainly haven't seen the end of competition for homes and pressure for prices to rise again.

One big difference is the fate of the conventional house-building industry. In the early 1990s the industry contracted, firstly because of falling demand and falling prices, and secondly because of high interest rates. A few developers went to the wall. This time developers are facing the same fall in demand, but it is the developer and a few investors, rather than homeowners, who are primarily being caught out.

Developers face a triple whammy: lack of credit, increased costs brought about by regulation and the consequences of switching building from green to ‘brownfield’ sites. Today's empty homes seeking buyers are small apartments in towns and cities rather than houses in suburbia. Most of the 1980s development pipeline could be turned off in the downturn by not building the next cul-de-sac; this is not an option for developers of half-finished apartment blocks. They have to finish the building to satisfy customers who have bought off-plan and to generate cashflow.

Even in the boom, housing was becoming much more complicated, long term and capital intensive. This slump makes significant industry change unavoidable.

The future will belong to those with unconventional business methods. Land development, on the one hand will require avant-garde, high-risk, high-reward businesses backed by long-term, patient investors. The conventional housebuilder will be better suited to a ‘contract plus’ business model, constructing houses on fully designed serviced plots on these ‘developed’ sites.

Another significant difference between 1992 and now is the state of household finances and the role of equity in property buying. Mortgage costs are far lower than in the last downturn, but the problems of raising a big enough deposit to buy or trade up are much greater. Levels of equity among existing homeowners are much higher now than in the boom, creating an even more pronounced divide between those who have it and those who don't.

The one thing that has remained constant over the past 21 years is the lack of homes people want in the places that they want them. We have added about a half of one per cent to the nation's housing stock each year since 1989. Many types of stock have not been built at all and exist only in the secondhand market. This underlying imbalance between supply and demand means that, sooner or later, buyers will be in competition with each other again.

Households without a cash lump sum will find a home without a significant growth in private renting or shared purchase schemes. The polarisation between those with income and those with equity is bound to lead to increased investment by the latter (especially those disillusioned with pensions and other traditional investments), and increased demand for rentals and co-ownership from the former. We can expect to see an increase in the number of homes owned outright and a very substantial increase in demand for investment properties.

If life continues to imitate art, what are we in for? Well, Damien Hirst curated Freeze, and his 2007 show title – Beyond Belief – reveals that his exhibitions continued to capture the vibe of the moment with prophetic accuracy. We may be alarmed that he has just announced a new show called Requiem. It may look as if something has just died, but there is huge scope for the rebirth of a new property movement and, given the forces and factors outlined above, it is difficult to see how future house price rises will be avoided.

It is very unfashionable to speak of a housing market recovery but an equity-driven, investment-motivated increase in demand looks very likely. Indeed, it already appears to be happening, especially at the top of the market. From that point of view, today feels rather like 1992 – the long, slow wind-up to the crest of the run. The majority of homes that rely on a buyer with a mortage will continue to languish with no growth for a while, but prime properties and some regional markets will take off earlier. The players have changed from occupiers to investors and this will change the way the game is played, but we are still on the rollercoaster.

This article first appeared in The Times.

Find Your Local