Market Comment -  In the Eye of the Storm
By all accounts, being at the centre of a hurricane is an unnerving experience. All is quiet and ‘normal’ but you know that, out of sight and over the horizon, trees are being uprooted and buildings flattened. The London property market feels a bit like this.

The economic news only gets worse. Billions have become ‘rather nineties’ as we and our unborn grandchildren have to get used to the concept of owing trillions. Stock markets have halved (or worse) and the financial system, on which so much of London’s prosperity is based, is looking like Amy Winehouse after a hard night out. Despite this, we have a book of clients that doubled in January and February; they have money to spend but there is not much to buy – and even reports of gazumping.

This may sound like a bull market – but if you examine things more closely, it’s probably more of a bear-market standoff. Most of these buyers want a bargain. They may not be out-and-out bottom feeders, but they certainly think that asking prices are too high and that sellers have to get real. The problem is that with interest rates so low – and they can’t go much lower – anyone that has a job and a tracker mortgage has never felt richer. Their ‘real’ is simply different and the gap between what buyers will pay and what sellers will accept is increasingly difficult to bridge.

As ever, much of this perception comes from talk and press reports about ‘average house prices’ and the ‘national property market’. There is nothing average and nothing national about the market we operate in. It’s a market that has more cash than debt and it’s about London; if the London market stalls, you can be very sure that houses on the Cornish ‘riviera’ won’t be far behind.

An example of how diverse the ‘national market’ is: there is a new development between Nottingham and Derby that we know about. It’s a conversion of an old mill that buy-to-let investors couldn’t get enough of in happier times – a twenty-five minute commute to either city and well converted and finished. Two flats there were sold in 2007 for £202,000 and £185,000 respectively. They have just been resold for £89,000 and £64,000. This story is being played out in auction rooms across the country.

Contrast this with the frustrations of a buyer of a nice two-bedroom flat in South Kensington or a pied-à-terre house in Chelsea. Cash in hand and a sense of entitlement in mind, there’s little for them to buy. Prices are still comfortably above £1,200 per square foot for what they are looking for and there is no sign of an incipient avalanche of distressed sellers. Having said that, it’s early days: the market was booming only a year ago, and historically housing downturns tend to go on longer than anyone thinks. The previous one lasted four years and, by any metric you choose, this one looks like the big one. Unlike the early nineties, however, when interest rates were north of 15%, we now have rates that are calculated to produce no pain – hence the eye of the storm sensation.

Being in the eye, we just don’t know which way the wind will blow when it hits. Are we looking at deflation, a Japanese-style grinding recession with asset prices working their way ever lower over a period of time we don’t want to contemplate? Or is ‘Quantitative Easing’ going to produce the goods – and a dollop of welcome (sic) inflation to boot? Governments are certainly doing the ‘Quantity’ bit but they don’t, as we have noted before, control the ‘Velocity’ of money – which is down to borrowers’ willingness to borrow and lenders’ ability and inclination to lend. While deleveraging is the buzzword, cash is king (even if it doesn’t earn you much) and bank balance sheets are in tatters, the velocity is more likely to be that of a Trabant than a Ferrari. It may be enough, but…

In the meantime, the market is adjusting. It is interesting that NoHo Square, the old Middlesex Hospital site in Fitzrovia, which was bought by the Candy brothers when the sky was blue, has just been sold to Stanhope for a fraction of the price they (or their backers) paid. Instead of luxury apartments for oligarchs, the new scheme will be pitched at the middle market, with flats priced in hundreds of thousands rather than millions. This always felt like a fin de siècle deal as Charlotte Street and its environs was unlikely to give Harvey Nichols and The Wolseley a run for their money, no matter what it was called – One Regent’s Park, perhaps?

The genuine top of the market, the so-called überprime, is still very difficult to call as there have been so few transactions since the demise of Lehmans back in September. High-profile sales in both London and the country have stalled – but the Spring does have a habit of bringing to life a market that has been prematurely buried. This Spring is no exception with some big deals going through in the last few weeks – not at the very top but certainly landmark sales. And prices? This is not precise as the knack is in matching apples and pears, but we estimate sales are taking place at about 25% less than the market peak eighteen months ago. The price per square foot seems to be stubbornly around £2,500 – which continues to confound the bears.

The simple truth is that there is still a lot of cash in this market and all the rational rules of thumb about where the ‘real value’ lies just don’t apply to markets where the purchase of the property in question will only make a small dent in the buyer’s bank account. Further down the market there are more rational levels. At its crudest, if you can find a property where you are buying a building for less than it would cost you to build, with the site thrown in for free, you’ve probably got a bargain. These are appearing in auction rooms and out of receivers’ offices. Closer to home, lending levels will eventually set prices wherever debt, rather than cash, is funding the purchase. The growling noises from the FSA suggest that we are entering a world where a multiple of 3.5 of earnings is likely to be the norm. It was over 6. Do the math – and consider the decoupling that is likely between, say, Chelsea and Clapham as a result.

In the meantime, back in the eye of the storm, we wait to see whether the frantic government activity of the past months will produce a brew of inflation (probably good for property) or deflation (almost certainly bad for property). On this there is no consensus – we are simply in uncharted waters. Perhaps we should leave the last word to Woody Allen. “More than at any other time in history, mankind faces a crossroad. One path leads to despair and utter hopelessness, the other, to total extinction. Let us pray we have the wisdom to choose correctly.”