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Jon Neale is a director of residential research at Jones Lang LaSalle


Is this the new normal? M


Jon Neale looks for the answer nobody really wants to hear.


ost people in the industry tend to assume that the housing market, like


the economy, is going through a bad patch. Eventually sales and prices will rise and things will go back to something like normal. When academics and analysts get together and discuss the housing market – thankfully away from those who have better things to do, such as sell houses – the phrase ‘structural change’ is mentioned a lot. What this means is that the changes we have seen over the past few years are not part of the normal cycle – this may actually be the ‘new normal’. Mortgages only available to those with substantial deposits? Check. Sales only taking place at a rate roughly half that seen before the crisis? Check. More people renting, and for a longer period of their lives? Check. The reasons for this go back to


two fundamentals: the mortgage market and demographics. The state of play seen in 2007


– widespread self-certifi cation, high levels of interest-only loans and often very low deposit requirements may never be seen again. That was the result of a of a decade-long economic boom and an improbably long period of rising house prices. By the middle of the decade,


third party and foreign lenders were piling in to join the party, increasingly fuelled by fi nancial engineering. Ultimately it was all driven by the great imbalance between Western debt and Eastern savings, an imbalance that will have to be resolved over the coming years. Currently, banks are still trying


to rebuild balance sheets whilst their limited ability to lend is


house. Most will be forced to rent: Since the fi nancial crisis, a million more households are renting, while home ownership is falling. Meanwhile, owner- occupation and wealth generally is becoming increasingly concentrated among older people, especially those over 50. They may be intending to use their equity for retirement, but they have moved beyond the life


“The past few years are not from normal cycle.”


threatened by the Eurozone mess. International and domestic regulation – Basel III and the Mortgage Market Review – will make the market permanently more conservative; banks will have to hold more reserves in relation to lending to those without signifi cant deposits, making loans to them signifi cantly more expensive. And that’s before potential bans on self-certifi cation, or greater scrutiny of interest-only deals. Young people will fi nd it far harder to get a mortgage. Indeed, with youth unemployment rising and real wages falling, it’s hard to see how those without either rich parents or elite careers could manage to buy even a modest


Events What’s going on


30 June to 1 July The Southern Homebuilding & Renovating Show, Surrey, homebuildingshow.co.uk 2 July Government Construction Summit, www.governmentconstruct.gov.uk 4 July RICS South West Property Conference 2012, www.rics.org 10 July BPF Summer reception, bpf.org.uk


www.thenegotiator.co.uk


10 July NFOPP Board Meeting, www.nfopp.co.uk 11 July Regional regeneration; Newcastle, www.bpf.org.uk/en/events/ 12 July RICS Wessex Briefi ng 2012, www.rics.org 20 July The Property Race Day, Ascot Racecourse, www.thepropertyraceday.com


TheNegotiator ● July 2012 ● 15


stage at which people move regularly. Many are unlikely to sell for a decade or more, reducing supply to the market. Young couples having children are simply moving to larger rental properties. Economics is another factor.


Before the mid-1990s, high infl ation (and wage growth) reduced the burden of mortgage payments. A few years post- purchase disposable income had grown meaning borrowers could take on a larger loan to buy a bigger home. This simply hasn’t happened over the past few years and looks unlikely to happen in the near future. For those who have bought since, say, 2004, the overall size of their loan


compared to their income has probably changed very little, even though their actual payments may have dropped thanks to the 0.5 per cent base rate. All this is before we remind ourselves that Bank of England rate is abnormally low. So what does this all mean for


estate agents? Well, fi rstly, the volume and number of sales is likely to be depressed for some time, and the market for house sales will be smaller than in the past. This may sound horrifying, but accompanying this will be a surge in rental activity. Lettings may have to become a more signifi cant part of the average High Street business. Over the next few years, many semi-professional landlords will probably increase their holdings, taking advantage of their equity, to out-compete fi rst-time buyers by accessing the cheapest loans. They will be very important clients moving forward. Finally, the market has become


more dependent on wealth and property equity. Sales volumes have been far more robust in more affl uent areas and for more expensive properties. The economy may boom, the


mortgage market may become ultra-competitive and prices may shoot up – but this is unlikely in the near future.


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