Understanding the Property Market

It is amazing how many people delay buying because they believe the market is falling, or rising too fast, or the market is steady and so may fall, etc. In their defence they are encouraged to do so by the media which loves to paint all price rises as worrying and all price drops as the possible start of something bigger.

Friends, family and work colleagues are also very keen to offer their analysis, often based on that very same media. It would be interesting how many of these advisors would be interested in knowing what Estate Agents, Solicitors and Surveyors forecast for the industries that they worked in!
How the market acts is actually surprisingly simple, but it is perhaps this simplicity that does not lend itself particularly well to headlines. It is crucial therefore to understand that:

• The current trend is for prices to continue to move up due to increasing demand for property and restrictions in new supply
• Waiting for a crash is fairly futile
• The market has a traditional cycle that means that prices do move down quite regularly, usually twice a year
• The media's reporting of the London housing market should be treated with extreme caution
• Regionally markets move up and down all the time but it is rarely reported
• The best time to buy is when everyone else is panicking

The Current Trend in the Property Market

The amount of land available to build on is restricted and the number of people who want to live in the UK is continuing to increase. One overriding principle to remember, in London, is that property prices have risen, almost continuously, since the end of the Second World War. In some parts of the city they have doubled every ten years over this period.

And the simple issue of supply and demand is expected to get worse. As of 2004 the Greater London Housing Authourity Commission estimated that there was a shortfall of around 250,000 homes in the capital. That figure is expected to rise to over a million by 2020.

Despite this well known trend the situation is likely to be exacerbated by moves such as the continued introduction of more conservation areas, the protection of green spaces and ever rising immigration.

All these go far towards improving the quality of life of the average Londoner which ironically will make the city more desirable and increase property demand still further.



The graph below demonstrates the problem by showing the decrease in the number of new homes being built over the last thirty years:

The Traditional Property Cycle

Despite what the media might say in its' headlines the property market does actually move down as well as up on a regular basis. There are dips and peaks which are generally misrepresented by the press causing mini panics in both directions.

The traditional cycle works something like this. Large numbers of prospective buyers recover from Christmas and think this is the year to move. Nothing much happens in January as the financial stretch that was Yuletide is recovered and many wait for confirmation of their bonuses.

By February both sellers and buyers are starting to test the market and by Easter things are in full swing. This is the time of year that you will expect to see the most choice on the market but because you are competing with the highest number of buyers you will pay a premium in a rising market. If you are not fussy don't buy now. If you are looking for something specific bite your lip and accept it.

By mid June many buyers and vendors minds are turning to summer holidays and the market is left with those properties that didn't sell along with a splattering of new homes coming on.

There is less to choose from but it may be possible to pick up a bargain from a vendor who did not sell in the Spring and is feeling sorry for themselves.
This it the market professional investors operate in.

In July and August the sunshine and holidays mean most buyers don't want to be spending their weekends and long evenings house hunting.

Any vendors on the market must have a pretty good reason to want to sell so although choice will be very low, if it is a deal you are after, now is the time to get it.

In September and October the buyers are back. A rest on some sunny beach (and in some cases the kids back at school) puts everyone in a good mood and for those who rented their own apartments while on vacation, the idea of coming back to a shared flat is not an attractive one.
Vendors are also back and choice is once again good. The same advice follows for this period as the Spring.

In recent years the intensity of the Autumn market has often outperformed the Spring as buyers compete frantically to find and be into a new home by Christmas, so watch out.

November and December are like June and July. If you want a bargain and don't need choice get out there. A low offer but the promise that the vendor could have the money by Christmas will be temptation and as most other buyers are saving for the festivities you can expect to tie up a bargain.

There is a trap here that no end of first time buyers fall into. They go out looking in November just to see what is around and get an idea of prices. They decide to wait until the New Year to get more choice. In the New Year prices are rising and everything they see is worse than what they looked at before Christmas but costs more. They keep looking and prices keep rising. They decide to wait for prices to fall which then starts to happen in the summer. Now there is nothing to choose from and what is available, even at lower prices is still more expensive than what they saw before Christmas. They wait until autumn but prices then start to rise again and although they may make offers, they base these on the summer market and they are outbid by other buyers. Before they know it they have been looking for a year and spent thousands more pounds in rent. A £200,000 property now costs £220,000. All told the year has easily cost them over £30,000 in rent and lost capital gain. Defiantly some change areas and start the whole cycle all over again!



The pattern is shown graphically below as a representation of what happens.



This is a rough outline and not to be taken in absolute terms. Sometimes, for example, there are more properties on the market than there are active applicants. The pattern in the graph also represents 'price agreed' - what is actually happening in real time. Experience teaches you the traditional cycle but there is no resource on the web or otherwise to tell you if, for example, the market has reached the bottom of the summer slow down or the top of the spring rise. The figures reported statistically are usually completions and these can take place anytime from one week to six months after the sale price is agreed.

Variations in the Traditional Property Cycle

The tradtional property cylce is knocked off course from time to time by outside events which cause a loss of confidence in property, just as some events cause the price of stocks and shares to plunge.

Recent examples include the 9/11 attacks on the World Trade Centre, the war in Irag in 2003 and the Credit Crunch of 2008.

For more information on this is and how it affects the market see Property Bubbles and Market Crashes