Is this the worst property market for 40 years? To be an active market you need buyers and sellers, a supply of a commodity at a price acceptable to both and the desire and ability to trade. Any on-line review of the current market will give you a partial view, usually based on statistics, which is broadly reassuring in respect of current value and demand but fails to assess all the factors needed to promote activity. The more transactions through the market the better. Headline statistics can look healthier than day-to-day deal flow.
Why does this downturn feel different from previous cycles?
Over the last 40 years there have been two major crashes following booms. In the early 1990’s due to economic recession and stratospheric interest rates, house prices fell by about 12%, commercial property by up to 20%. The global financial crisis in 2008 caused domestic property values to fall by up to 20% and thereafter stagnate, and commercial property to drop by up to 40%. However, each such collapse was followed by a very strong bounce back and values recovered. In the latter stages of COVID we saw a downward pressure on value across most property assets but not the falls as in earlier recessions. What is unusual, following the market correction in the early part of this decade, is the delay in the recovery in activity. This has been caused by world events, being wars and tariffs, and the change in the strength and nature of the UK economy. Might it also be in the stickiness of values and the shortage of supply? Today’s issue is not a dramatic value crash, but slower than expected recovery in confidence, activity and viability.
Demand has not disappeared, but delivery is constrained
The one great truth regarding the property market is that underlying demand has always grown. The precise nature of what is needed does change and the market must adapt. Any recession or stagnation in activity only leads to a pent-up demand and as soon as the market works out how to meet it, the bounce back occurs. Delivery into the market requires optimism, planning and investment. This needs an understanding of and belief in the future and funding to bring the product to market. There is currently a shortage of supply in various sectors, which enables current values to hold steady, but can that shortage be addressed at an acceptable cost to the buyer and anticipated return to the seller?
Can the gap between buyer and seller be bridged?
Here is the current problem for sellers: Less confidence in the future market, higher present costs of production caused by planning friction, construction inflation, building safety requirements, debt cost and tougher viability thresholds. There are higher returns and more certainty for investors outside our mainstream property market.
Here is the current problem for buyers: Resilient values; borrowing costs failing to reduce and stabilise as had been anticipated; and lack of supply in areas of demand.
Where is there activity?
House builders can find ways to incentivise buyers and, in some regions, benefit from relocation of buyers from less affordable areas.
Commercial demand is growing for office and industrial space and distribution hubs in good locations.
First time buyers can find housing in secondary areas with borrowing costs easing.
What this means in practice:
- Pricing expectations are still adjusting, and realism on both sides remains key to unlocking transactions.
- More deals are progressing where there is flexibility in structure, timing or incentives.
- Early engagement with funders and advisers is becoming increasingly important to manage viability and risk.
The property market has always adapted to change, and I have every anticipation that there will be a boom again in activity to meet the growing demand and a way found to match buyers and sellers. This is not the worst property market for 40 years but it does seem that the downturn in activity is at least as long as after the financial crisis in 2008. We need confidence which comes from stability, and a settled view of future borrowing costs. We have gone through an unprecedented period of rapid and unsettling change but this cycle will lead to calmer waters. I look forward to several better years ahead, which might well start soon.
If you would like to discuss anything to do with the changes in the market, please contact our Real Estate team.