Back to the drawing board?

The most fundamental task facing the property sector of the UK economy as a whole is to learn to live by a completely new set of rules.

The delusion of perpetual escalating prosperity which we all embraced, to some degree, during the decade-or-so leading up to the October ’08 crisis was built on one central assumption; that property values and prices would rise and rise and rise.

This assumption underpinned the core financial strategy of banks, retailers, developers, investors and housebuilders.

It influenced the board decision of countless organisations large and small, and the endeavours of countless public servants throughout all strata and systems of government.

It also became the cultural basis of credit over-spending by the population as a whole.  Driven by the voracity of the banks and credit card industry, living beyond ones means became an established norm for an entire generation.
In those distant days, the worst case scenario for both businesses and individuals was not bankruptcy, ignominy or a lifelong struggle with debt. It was remortgaging your property assets or moving house to restructure your debts with effortlessly obtainable funding from the banks. Their interests were best served by fuelling belief in the endless, upward ascent of property prices.

Of necessity, we have become accustomed to the world where that bubble has well and truly burst but now we have another major readjustment to make. We face several years of paying for the soap, water and hot air that went into the illusory bubble.

For those in any doubt about the veracity of this argument, the collapse of Connaught came as the ultimate reality check. Here was a plc, valued at £600m, with 10,000 employees and its feet firmly rooted in copper-bottomed public sector maintenance contracting.  In a way, it became an iconic symbol; proof that the property price delusion was reality.  Its demise leaves us in no doubt that our world has changed beyond recognition. How the mighty have fallen.
The new Government’s inevitable response to ensuing national bankruptcy brings this realisation into even sharper focus.

With local authorities seeking at every opportunity to balance their reduced budgets, the cost of maintaining existing housing stock is clearly going to be under scrutiny along with curbs on capital expenditure on social/affordable housing spending. With millions of households locked in negative equity, many will find themselves trapped in the position where they need to move to seek available work and are unable to afford to do so. This points to stagnation in residential mobility, which the government will ultimately be powerless to address.

This imbalance has traditionally created opportunities in the letting market. Rentals rates are likely to increase, giving some modest stimulus to the pre-existing residential sector.

New-build giants, Bellway, posted dramatically improved figures which has gone some way to alleviating concerns, but considerable doubts remain about the shortfall between the money supply and demand in the new build private housing. The prospect of lenders returning to anything approaching the ‘pre-crunch’ criteria seems very remote indeed. The 90-95 percent mortgage seems to be several years away.

The estimated loss of 40,000 jobs in the North West of England, 30,000 in the public sector and 10,000 in industry and commerce, also speaks of downward price pressure and stagnation in residential housing as the newly unemployed seek to put properties they can no longer afford to live in on the market and perhaps take the rental route.

Will a shrinking public sector put similar downward pressure on commercial property? The effect should be limited.

Hard-pressed councils may offload land, buildings and service facilities by selling onto an already flat market but the impact on, say office rentals, will be negligible.  Indications are that after the massive commercial property development upsurge of the urban regeneration boom years, supply will outstrip demand for some time.

Businesses and particularly professional services firms, however, are extremely adept at adapting to changing circumstances.  The continuing rapid evolution of the IT/digital/media industries in the North West, national restructuring of the legal sector (post Oct 2011 de-regulation) and resilience of the car manufacturing and retail sectors offer some prospect of recovery.  Whether this will be enough to compensate for the region’s loss of defence and aerospace production remains to be seen.

Many of our key industries, energy, petrochemicals, plastics, pharmaceuticals and transportation seem well placed to take advantage of the expected upturn.  The huge industrial and economic diversity of SME’s in the region also offers brighter prospects in a general recovery, which will in turn be reflected in a more robust commercial property market.
In short, the NW property sectors have fared as well as many of other UK regions during the downturn and have the opportunity to recover more quickly than some.

Younger property professionals who earned their stripes during the ‘days of wine and roses’ have been extremely quick to learn that only the fittest and most agile will survive during the next few years.  Eventually, let’s say in four-to-five years time, something approaching normality will be restored, as the developed world put’s its financial house in order.  In the meantime, try to be patient and take comfort from the statistics gleaned from the past 150 years of property pricing (including two catastrophic world wars). Sooner or later, property always produces a fair return.