Platform: What will we do when housing market soars again? And it will
NEW house sales are at an all-time low, and mortgage providers have upped interest rates and increased the level of scrutiny that borrowers are subjected to – as well as insisting on larger deposits.
As one week has lurched into another, and we have heard the latest vision of doom and gloom, I have become increasingly concerned over commentary on two key aspects – house-price deflation and the spectre of negative equity, and the writing down by major housebuilders of the value of their land banks.
Dealing with the latter point first, land banks, by their very nature, tend to be speculative holdings. They may consist of owned land, or optioned land, the value of which is dependent on securing planning permission then either building homes or selling the land on and benefiting from the enhanced land value.
Why, then, have vast tracts of land been devalued, leading to some company losses in excess of 1 billion when, by their very nature, they are being held for future promotion and development? The market to sell land with planning permission may have temporarily shrunk significantly, but for the majority of these landholdings, the market will undoubtedly have recovered by the time they are progressed through the planning system.
Turning to the almost daily headlines about falling house prices, the drying up of liquidity in the market place is clearly having a profound impact on the market at the moment. There has been an increase in activity over the past two to three weeks, but essentially it is not good news.
When money was readily available and relatively cheap, it fuelled aspirational house purchases, just as the increase in interest rates has now constrained the market. Undoubtedly, sellers are now more realistic about what price they can achieve, and this has helped to open up the market…very slightly.
However, prior to August last year, Scotland had a massive unmet demand for housing. This demand was felt across the board but was especially evident in the demand for family housing. This lack of supply was reflected in the Scottish Government document, Firm Foundations, which challenged the development industry to provide 35,000 homes per annum, up by 10,000 units on what was then the current level of supply. This increase was required both to meet actual demand and to help control what was, at the time, rapid house-price inflation.
This pent-up demand is now even more pent-up. As soon as liquidity returns, there will be massive demand for all types of housing. High demand will lead to one thing: rising prices. The higher interest rates and increased scrutiny we are all experiencing will clearly go some way to tempering affordability and, therefore, house price rises. But this will further hinder supply.
Here comes the double whammy. Due to the effects of the credit crunch, the impact on the housing and construction industry has been huge. Developers are not building houses unless they have already been reserved, and this is not even a guarantee that the purchasers can complete. In the past, this has not been a problem – one buyer falls through, move on to the next one…not any more.
So, to add to the huge pent-up demand, we have a massive under-supply and a sector that has effectively ground to a halt. Don't worry if your property feels like it has fallen in value, because as soon as the situation improves, the demand situation will see values sky-rocket, easily outstripping any negative impact of the current economic climate – perhaps.
Looking simply at the future demand and supply of housing in Scotland, we have come to a shuddering halt in the building of new homes, whilst the actual unfulfilled demand remains strong.
As soon as liquidity returns (perhaps as a result of interest rate cuts) we are going to have a massive imbalance – and an industry that has cut half its workforce and is woefully prepared to react.
Search for a job
Search for a car
Search for a house
Weather for Edinburgh
Sunday 19 May 2013
Temperature: 10 C to 16 C
Wind Speed: 8 mph
Wind direction: North
Temperature: 9 C to 20 C
Wind Speed: 7 mph
Wind direction: West