The property slide

I have been a pessimist about UK commercial and residential property.

Values of commercial property have been falling for months. Commercial rents are weak. There is a substantial overhang of space. Retailers have gone bankrupt, leaving empty shops. Considerable new space is being completed in the City when tenant demand is weak. Businesses under pressure find it difficult to meet rising rent demands, and are often looking to reduce their floorspace as an economy measure. There are some brighter spots, and there are some buyers about seeking to find bargains now there has been a sharp fall.

Residential prices have also fallen, though less dramatically than commercial prices. Some estate agents now say there is a shortage of supply, and think prices might now stabilise or even rise from here. Normally it takes rising real incomes, stronger mortgage provision and an end to rising unemployment to provide good upward momentum to house prices, but these are unusual times.

There are two arguments the bulls put forward that are worth examining. The first applies mainly to central London. The apparent fall in sterling prices can be doubled for a an investor coming in with one of the stronger foreign currencies. To the overseas buyer London property looks a lot cheaper than it does to sterling based buyers who live here. There are cash buyers around who have always fancied smart London base who think now is a good time to take advantage of the apparently cheap prices in their currencies.

The second consideration applies more widely. The supply of homes onto the market is very limited. Many people do not think they could sell their property for a decent price, expecting the market to be poor. Trading up is being delayed by people worried about their job prospects or expecting lower prices for the bigger home if they leave it for a bit. You might expect more distressed sales. With interest rates very low more people can mange the mortgage. More institutions so far are seeing through customers with temporary difficulties. This could change for the worse as unemployment climbs.

We have probably seen the biggest part of the falls in both commercial and residential property. There will be some who buy at a discount to current prices where there are distressed sellers or properties with potential and take advantage of current lower levels to find longer term value. We need to remember, however, that the existence of some foreign buyers for London property and the existence of some hotter spots within commercial property does not overnight solve the difficult credit conditions, the falling rents and the poor outlook for tenant demand. If the economy grows more slowly this decade as we fear, and if there is less credit around, we have to adjust to a different level of property values overall relative to incomes.


  1. Ian Jones
    June 12, 2009

    Not to mention interest rates have now bottomed and are quickly rising. Supply of housing may be weak but if prices rise then so will supply.

    Expect houses to bump along with the economy.

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  3. Waramess
    June 12, 2009

    What, I wonder are the fundamentals that cause you to think that residential and commercial property values have seen the biggest part of their falls.

    Unemployment will continue to increase and have a profound effect on commercial property values, or do you think unemployment has bottomed out?

    First time buyers will not return in force to the residential market until they can buy eigty five percent of a starter home for three and a bit times salary, or do you think we are there yet?

    And the elephant in the room is of course interest rates. All well and good to think the storm has passed, but if interest rates start rising what effect will this have on those green shoots?
    I would be willing to bet the worst is yet to come. All the fundamentals are pointing in that direction. So called QE might have slowed the recession but what happens if you slow a speeding car: it just takes longer to get to where your’re heading.

    If the government have slowed down the recession how much more difficult will it be for industries already teetering on the brink to last that much longer, and what will increasing interest rates do for them?

    A politicians life is spent stumbling from one catastrophe to another. Why should it be different this time?

    1. Stuart Fairney
      June 12, 2009

      Unemployment indicators typically trail the recovery by 12-24 months. I agree we maybe in for a rough ride, and real values may not increase, but inflationary pressures are in my view, seriously under-estimated.

  4. Mark
    June 12, 2009

    The story about foreign buyers for central London property is an interesting apocryphal myth, I suspect. It may have been true for cash transactions in the tiny £5m plus market briefly when we were at nearly £1 = €1 and £1 = $ 1.35, but sterling has rebounded making any conveyancing delay expensive if no hadge has been taken out. Coupled with a bounce in transaction prices, this market now looks overdone again. Indeed, Elle Macpherson has just been reported as reducing the price on her Notting Hill property by £2m.

    The current “dead cat bounce” is fuelled by cash rich buyers – mainly those who had sold to rent who find that they are no longer earning an income to pay their rent on their cash who fear that although in real terms prices can still be expected to fall, quantitative easing could lead to rapid inflation in the general economy, and rising nominal house prices. The supply of such buyers is limited, and when they run out real prices will start falling rapidly again. It is worth noting that mortgage company statistics treat an STR buyer as “first time” – only those moving from one mortgaged property to another are deemed to be “moving up the housing ladder”.

    Alice Cook is a very sharp observer of the scene, well worth reading: her post here:

    picks up a confession that the BoE seem to be under instruction from Brown to inflate the housing market.

    It is worth pointing out that no housing market bust lasts less than 4 years, with 6-7 years being more typical – see the excellent research by Prof Morgan Kelly of UCD on over 40 crashes in OECD countries since 1970. Since the market peaked in 2007, we can’t expect a real bottom to be reached before 2011 at the earliest, and most likely, much later given the severity of correction needed to restore normal price to income ratios (the market will overshoot to the downside).

    If we move to an era of high inflation, then real price falls will probably be more rapid, because a) nominal interest rates will have to rise, temporarily eating into budgets through higher mortgage payments until wages catch up; b) the real value of saved deposits will erode, limiting what highly geared buyers (85%+ mortgage say) can pay in real terms. Of course, just as in the 70s and 90s, inflation will erode the value of debt for those who can hold their breath long enough.

    Of course, if we end up with a gilts strike and currency collapse then prices in real terms will completely collapse, although we’ll all be trillionaires.

    1. Stuart Fairney
      June 12, 2009

      You are correct to differentiate between real and nominal house prices, this is absolutely the key. You may find this data interesting

    2. Mark
      June 15, 2009

      Now some former constituents of yours? also seem to be having trouble selling:

      Perhaps I should have added to my original comment the possibility that the UK property market goes “Japanese” – with 90% falls from the peak in nominal terms for some of the most overpriced properties (will anyone really pay £120m for a flat in St. James’s as the Mittals supposedly did? ), and perhaps 60-70% more widely, returning prices to pre-2000 levels.

      The fundamental point is that a lifetime’s earnings have to cover a lifetime’s costs on average. High house prices reduce the money available to be spent on other goods and services. If we transfer wealth to (foreign) bankers by inflating property prices and borrowing abroad to fund it, we impoverish the nation. This is as much a problem for the UK as is the burgeoning government deficit and weak balance of payments.

  5. Javelin
    June 12, 2009


    I agree that house prices will not grow so much – but the UK has been greedy with houses and I forsee irrational purchases in the future.

    However, in the short and middle term, the bigger context is (1) the BRIC countries will drive international inflation up (2) interest rates are at near-zero and will need to go up to counter inflation.

    There are alot of people out there who are still on high owner occupied and buy to let mortgages and when, not if, interest rates go up these people will become distressed sellers.

    Houses have “only” fallen by 20-25%. I would expect a further 10% fall in house prices. We have a seen a small blip in house prices recently, but this is a seasonal adjustment on a longer term downward trend.

  6. Frugal Dougal
    June 12, 2009

    We’ve had a few commercial properties falling empty in Cambridge. One, on the city’s “diverse” Mill Road, was targeted by a bunch of hippies who turned it into a community centre to try to prevent the shop falling into the hands of Tesco’s, who were going to sell ordinary goods to ordinary people who didn’t want to, or couldn’t traipse up and down Mill Road an go into umpteen shops. The hippies won – their latest trick was to beat up a woman in her sixties who was collecting pro-Tesco signatures.

    I think we need to be mindful of sinister socialist agendas dressed up as they might be voiced as social-workers – for exampe, the website for the “community centre” once advertised martial arts lessons “for aggro when the police come”. Thakfully, the squatters offered no resistance when they were eventually evicted – but Mill Road still lacks a Tesco’s.

  7. oldrightie
    June 12, 2009

    “Some estate agents now say there is a shortage of supply”

    It is always a mystery to me how millions of people have poured into the country and house building, (thank goodness) has not kept pace. Where are they all living? A, I think C4, programme, a little while back showed us sheds and shanty houses littering Staines. Never gets the publicity it deserves.
    Of course to bring up the enormous negative pressures brought about by Labours’ attempted importation of votes failure is not allowed to be mentioned or discussed.

  8. Acorn
    June 12, 2009

    JR, I am sensing an air of depression in your recent posts. All the excitement of recent weeks is abating and the nation is going back to its primary concerns with property prices and paedophiles.

    Parliament has gone back to debating things which aught to be debated at local Council meetings and vomiting more knee jerked, media hyped legislation, that originated in some one man and a dog, single issue pressure group.

    The Warp drive has conked out on Starship Gordo, so we’re down to thrusters only for the next twelve months. The crew are all on the Holodeck playing out various scenarios from the film “Terminator 2: Judgement Day” and wondering if their trade union sponsorship will still be there next spring. Meanwhile, it’s fill your boots time for those trade unions, particularly in the public sector.

    I am officially giving up on my mission to separate the executive from the legislature and rebuilding the local government structure. (See this bit of Hansard). Gordo knows best, the founding fathers of the US Constitution were all wa***rs.

    I can only look forward to more taxes and inflation. I am a broken man, sorry, person. Talking about inflation, good piece from Shostak (for Austrian School Redwoodians), “We suggest that inflation is not rises in prices as such but the debasement of money”. Worth a read.

    1. DBC Reed
      June 13, 2009

      There does seem to be a change of attitude on JR’s part :from a bullish belief in the property-owning democracy project to a reluctant recognition that houses can get wildly overvalued.The logical next step would be to examine the claims of land taxers that a tax-block should be put on anti-recessionary stimuli creating another housing bubble .( A tax on land values would encourage developers to increase the supply of housing by building on land being kept idle in hopes of its price going up without the fag of building anything).

  9. Freddy
    June 12, 2009

    Surely the overwhelming issue for property prices, particularly in Central London, is the level of interest rates.
    Our current artificial environment has meant that mortgage payments have reduced, and so there are relatively few forced sellers (by comparison with the early 90s). Whoever wins the next election is likely to raise interest rates, probably quite substantially, and all those recent buyers are going to start finding their mortgages getting seriously painful.
    If this also results in the currency recovering, it will take away the prop of foreign buyers that you mention.

    So I would have thought that next year is when property really starts crashing.

  10. Working Class Tory
    June 12, 2009

    Very good points made.

    Unfortunately, the buying up of British property by foriegners, especially those from the East, as one suspects will be the case, will further increase resentment of a BNP nature.

    June 12, 2009

    We blogged last night re your previous discussion piece on the banks.
    To reiterate we believe the property market will get a needed shove if buy-to-let interest rates (to borrowers with good track records) are reduced to around base + 2%. (but not necessarily the Base + 0.25% – 0.75% that we are currently enjoying!)

    As an aside we’ve blogged the Daily Politics today on GB’s Cabinet meeting and his current intentions on ‘taking the fight to the Tories’ as no doubt proposed by Mandelson, Campbell and Whelan! With permission we reproduce below…

    To: Andrew & Anita

    “This morning he’s holding a special political meeting of his newly formed Cabinet, discussing how he plans to take the political fight to the Tories.”

    This is so typical of where Gordon Brown goes wrong and why he will never become a legitimate and respected Prime Minister.

  12. Therese
    June 12, 2009

    I agree that it is tenant demand that is the real challenge.
    New tenancies are likely to be rare in these challenging times – optimism is not high but there are more distressed sales as people are looking for work anywhere and having to move.
    Savvy tenants may be looking for cheaper new leases or pick up existing ones at reduced rate to fill spaces on high streets and industrial estates.

  13. Stuart Fairney
    June 12, 2009

    A good analysis as ever, might I also add inflationary pressures and negative real rates of interest in the coming months, together with ‘Mugabe’s~own’ QE may also contribute to price hikes as people take flight from devaluing fiat sterling

  14. Michael Lewis
    June 12, 2009

    Interesting article. Under many metrics residential property is over-valued. I think the recent price increases are largely due to an ill-liquid market.

    I do think the Government, through QE, will leave the money taps on too long – to stimulate housing, this will just create inflation.

    Too many people in the UK view their home as a pension investment in addition to a home. In part this may be because Brown stole pension funds.

    I do wish the stamp duty tax could be abolished. It makes sense for government to realise that an orderly housing market (on historic income multiples) is healthier (economically) than encouraging individuals to borrow huge amounts of debt. But it seems many MPs are quite attached to housing as an investment, or housing as 2nd holmes. I think of course of Jacqui Smith and her main residence being a box room in her sisters home.

  15. Fool
    June 12, 2009

    It’s terrible. We moved here hoping to settle for the long-term, but now find that it may be years before we can even consider buying a house. I wish there were more rent-to-buy schemes available.

    We have been living off savings because employment has been a joke – it might not be if I didn’t have so many hoops to jump through with the GMC.

    To top it off, the government wants to point out the rise in house prices as a sign that we’re coming out of the recession. How will this economy support the rise in house prices if fewer people can afford to buy into it?

    I’m also saddened to see local retail shops closing – it’s an end to the British shopkeeping culture. The only ones to survive are coffee shops and restaurants – mostly multicultural.

  16. Dee
    June 12, 2009

    There are of course two Brown elephants in the room that will cause the market to stall.

    1 Hips. People will not be keen to put their house on the market as a tester if it costs them an upfront fee.

    2 Stamp Duty. At the lower levels it is an inconvenience and a reminder of the cost of delegating government to ZanuLabour. However once the price goes up the cost is significant. Is anyone going to speculate, when over £500,000 the cost of moving including estate agents, hips and Stamp Duty (tax) is going to add 10% onto the cost?

    In my view the market is going to bump along the bottom for at least 4 years.

  17. Mike Stallard
    June 12, 2009

    Out here in the Fens, there are several large gaps in the town centre shopping area and lots of charity shops. We have a few “Poundaround” types shops too. There are quite a lot of pubs. Also, there are still a very few interesting shops selling things like tools, computers and camera equipment.
    I am reminded of Watford in the early 1990s before White Wednesday” and Mr Soros.
    Out here in the suburbs, houses which were built before the crash are not really selling. There do not appear to be many “Sold” notices out there either.
    In our Church, which is, of course, the kind of place where the homeless, hungry and hopeless congregate in the evenings, there does not, at the moment, seem to be much action.
    I think I saw a beggar on the street of Wisbech last week, but it could have been a drunk young man.
    The Poles went ages ago and we are waiting with bated breath for the Latvians…..

  18. DBC Reed
    June 12, 2009

    What is the reason for the commercial property going down in value so much more than residential?The credit crunch was supposed to have started with sub-prime mortgages for houses.Was there an equivalent set of sub-prime tenants renting shops and offices?
    And a lot of mortgages went down in value ,thanks to low interest rates,so you would think they had more to spend in shops which the owners are,no doubt, willing to let at low rents .The High Street should be picking up.
    Or are there other factors in play but not in the political calculus?

    1. Derek
      June 15, 2009

      I’m in retail. Basically there was nothing wrong with the tenants it was the landlords who were subprime. They would buy a commercial property with an enormous loan (usually from HBOS – so guess who’s got the loan book now). They would then try and crank the rent up through rent reviews to make the property worth more then ‘flip’ it. The money received from the sale would then repay then loan and leave a large profit. They would then rinse and repeat.

      Unfortunately, for them. eventually the music stopped and they were over-leveraged without a chair. This effect was accentuated by all the cheap debt money that was swilling around in private equity backed retail businesses (the closest to the subprime retailers you describe) who had ludicrous unsustainable business models funded by debt (usually courtesy of Mr Peter Cummings at HBOS or an Icelandic bank). Many of these businesses have gone bust or pre-packed, but everyone else is left struggling to pay the exorbitant rents.

      The other big factor decimating commercial property prices is that if you are a landlord and don’t have a tenant you have to pay the council the business rates your tenant used to. For example, Woolworths were your tenant paying you £100k pa rent net income to you. Woolworths go bust and instead of getting £100k a year income you go into negative cashflow and have to pay £40k+ out a year on business rates whilst also repaying the massive loan you took out to buy it, never imagining you’d have a tenantless property (most landlords are just paying interest only on loans now whilst banks turn a blindeye to covenant breaches or loan-to-value)

      The problem is the wrong people are being bailed out. The banks, who made the egregious loans, have been bailed out by the taxpayer which has allowed then to keep their landlord debtors on life support. It’s the retailers, who actually employ large numbers of people, who’ve been forced to the wall.

      Basically, I’ve opened about six new branches this year. I am not paying rent on any of them and in some cases the landlords are paying a percentage of my business rates as they’re so desperate to mitigate losses. I turned down a deal the other week where it was rent free and £20k pa contribution to business rates as I reckoned it would still be impossible to turn a profit in the current trading environment.

      Scared – you ought to be. By my reckoning a very large amount of commercial property (upon which huge loans and pension funds rely) is completely and utterly worthless. Nothing but an enormous business rates liabllity that you wouldn’t be able to generate sufficient revenue to cover.

      Your post is too open-ended for me to cover all the points in it but I hope this helps in understanding the current parlous state of the commercial property market.

      BTW I do agree with your earlier post. I also felt that JR thought there was nothing wrong with high property prices, per se, until it became clear they were untenable to sustain.

      1. DBC Reed
        June 15, 2009

        Many thanks for your courteous and well-informed reply. I did n’t really think the High St was full of sub-prime tenants: this was just a way of eliciting the real causation which you have done so much to supply.
        There has been a lot of talk about pub closures,not being caused by the smoking ban and the credit crunch but the pub chains going on wild property purchase binges and when this did n’t work out, upping rents beyond what the pub-tenants could pay.So this complements your account of High Street problems.
        I still think that not all the problems are caused by sub-prime property owners seeking to recoup over leveraged positions by charging high rents: even property owners who own outright withoubt debt cannot let properties at any price however low. Something is going on.
        Something also is going on,as you say, with JR’s attitude to house prices.
        He is obviously revising his market-is-never-wrong position on this, but cannot like Sarah Webb of the Chartered Institute of Housing in yesterday’s Observer (Business) call for the tax system to be brought into play to stem house price inflation .

        1. Mark
          June 15, 2009

          I think you’ll find debt securitization sucked in foreign funding to both the commercial and residential property markets. In essence, property became a pyramid scheme funded largely with foreign money. In the commercial sector, gearing up with debt and inflating values allowed large dividends and bonuses to be paid. Residential property has seen the building of highly geared, rapidly expanded buy to let portfolios that have priced out first time buyers: meantime mortgage statistics make it quite clear that “equity” was being withdrawn on remortgaging as a matter of course, and where this was not spent on adding value to the property, it had a large propensity to leak into imports (expensive foreign cars and holidays).

          It is known that fraud has been rife in the housing and mortgage markets due to inadequate regulation by the FSA inter alia: “liar loans” based on self-certificated income; over-egged valuations; hidden cashbacks inflating recorded transaction prices (particularly for newbuilds). Only long after the horse has bolted has the FSA started to prosecute a few from the motley cast of solicitors, brokers, estate agents, surveyors, builders and mortgage providers. A free market can only work if it is not rigged. The housing market has long been rigged – to provide the “wealth effect” spending that has been the real “underpinning” of Gordon’s “miracle economy”. The miracle is a chimera: Prospero spake the epitaph

          These our actors,
          As I foretold you, were all spirits and
          Are melted into air, into thin air:
          And, like the baseless fabric of this vision,
          The cloud-capped towers, the gorgeous palaces,
          The solemn temples, the great globe itself,
          Yea all which it inherit, shall dissolve
          And, like this insubstantial pageant faded,
          Leave not a rack behind.

  19. […] by cabalamat on 2009-Jun-13 John Redwood says: I have been a pessimist about UK commercial and residential property […] Residential prices have […]

  20. Cabalamat
    June 13, 2009

    “I have been a pessimist about UK commercial and residential property … Residential prices have also fallen”

    If falling house prices are a cause for pessimism, that implies you want to see higher house prices. An average house already costs c. £220,000, but there’s no reason a decent-quality starter home should cost more than around £20,000.

    The reason house prices are high is because planning restrictions deliberatly make it hard to build new houses, therefore restricting supply. If you want this situation to continue, you are saying that only rich people should be able to afford a house. Is that what you believe?

  21. Bazman
    June 13, 2009

    If you think Labour have had left wing policies in the last ten years you just don’t get it. Their right wing ideas and fawning on the free market and the City have caused socialism for the rich, with their middle class union hating supporters cheering for a City which has wreaked havoc on the country and is now receiving massive subsidies from the taxpayer. Say it. ‘subsidies’ Now say it again and think about all these ‘Private’ Ha! Ha! Companies receiving, that word again. Subsidies! A much larger proportion of the money wasted by New Labour went into the pockets of the middle classes than the average guy on the street. and don’t forget that large tax free gift you received every year in the form of house price inflation. Cash in your chips and move to a cheaper house all you bleating civil servants and hospital managers, not to mention all those business that supplied the government with this waste. Tory waste will be in the form of unemployment subsidies and the police.
    Most houses where massively overpriced right across the market. Average wage against average house price was just not real and is still not. In the real world the difference is stupendous and a burden to the majority of the population. Notice how rent has hardly fallen? The landlord cannot reduce the rent because house prices have fallen. He just goes to the wall. The quality of rented accommodation has gone down instead, particularly in the size of living space.
    Stamp duty to most people is absorbed and reflected the price of the house and is not relevant. Most do not care less about the duty you had to pay on a five hundred grand house. You are probably a banker or a civil servant paid by state subsidised agency anyway. The banks have made it difficult and expensive to get a mortgage. Though you will still be able to re-mortgage for a car. If you can take the drop on a hundred grand car then you are also stupid enough to pay the aforementioned stamp duty. The house price fall is just the market waking up to the real world and realising it is somewhere to live and not a source of income. Foreign buyers a bit further down the social scale push up prices for most. Who can compete with five to a car/room? and you have got to laugh at City bankers bleating about being pushed out of the London housing market by Russian oligarchs. They just don’t get it either. The politicians as a body never got it either. How can any of them say anything against public opinion when that is exactly the business they are in?

  22. David Herr
    June 14, 2009


    Always informative. I have been following your career since the mid-90’s, and I hope, if things continue as they are and Mr. Cameron becomes PM, that you will have a role to play in guiding the Tory government towards true conservative policies. A party that is supposed to be conservative, but betrays conservative principles, will never last long (e.g., the 2001-2007 Bush Republican era).

    I am a commercial property broker in the U.S. (CA, to be exact), and I can tell you that here, the crash in commercial properties is just beginning. It will play out over several years, because it is over the next several years that the worst of the securitized commercial mortgages will come due for refinancing, and at that time, even if they have tenants, they will not meet the loan-to-value criteria for refinancing. The securitization market is completely dead, so that route for refinancing is gone. It’s banks, insurance companies, or bust. And the underwriting criteria have gotten much more strict. No more 90% loans based on pro-forma rents with an assumption of 4% rent growth per annum.

    What that will mean is that, over the next 3-5 years, properties will be going into default, and banks will finally have to recognize losses on commercial loans that they are currently carrying at the full value of the loan.

    My question for you is, did securitization play as big a role in financing commercial and investment properties in the UK, as it did in the US? And does the UK face the same loan maturity schedule over the next few years, that will cause serial defaults? Hopefully, the underwriting on commercial property in the UK was not as bad during the boom as it was in the US.

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