Transcript The UK Property Market ‘Back to the Future’

The UK Property Market
‘Back to the Future’
Grenville Turner
Group Chief Executive
Countrywide plc
The UK Property Market
– ‘Back to the Future’
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House prices are sliding as a result of
difficulty in obtaining mortgages
Homebuyers are facing the
consequences of the profligate behaviour
of the banks whose executives have
been focused primarily on their own payouts
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Inflation is gathering pace, thanks to higher food and fuel bills
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According to the Nationwide the average property value is £10,077
Anne Ashworth
The Times, 2nd May 2008
The UK Property Market
– ‘Back to the Future’
So why are we here again?
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Unprecedented competition amongst
Lenders
Insatiable demand for home
ownership
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The ‘illusion’ of excess capital
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The growth of property advisors
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Reckless management of interest
rates
The UK Property Market
– ‘Back to the Future’
What is different?
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Housing now part of the
Global Economy
Multiple ownership is now
commonplace
Mortgage finance is provided
through increasingly
sophisticated products
The UK Property Market
– ‘Back to the Future’
When the US sneezes, Europe catches a cold!
US Residential Real Estate Market Trends – Continued Overhang
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Inventory of existing homes (months supply)
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Existing monthly home sales for 2007 & 2008 (m-o-m %
change)
The UK Property Market
– ‘Back to the Future’
US Housing Market Long-term Fundamentals
US housing market growth has been supported by strong US demographics and economic fundamentals
Up-markets are greater in magnitude and longer in duration than down-markets (not your typical cyclical industry)
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Number of existing home sale units (‘000s)
7,500
Median existing home sale price (‘000s)
$250
$200
5,500
$150
$100
3,500
$50
$0
1,500
1972 1976 1980 1984 1987 1991 1995 1999 2003 2007
Source: NAR
Transaction volume ($ billions)
1972 1976 1980 1984 1987 1991 1995 1999 2003 2007
Source: NAR
Average home size (sq-ft)
2,500
$2,050
$1,550
2,000
$1,050
$550
1,500
$50
1972 1976 1980 1984 1987 1991 1995 1999 2003 2007
Source: NAR
1973
1978
Source: U.S. Census Bureau
1984
1989
1994
2000
2005
U.S. Housing Market Long-term Fundamentals
(con’t)
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Demographics
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Trading up
U.S. population has grown at a CAGR of 1.1%
since 1975 (exceeded 300 million in 2006)
Combined with increased home ownership rates,
demographics have contributed nearly 2% to
housing demand
Population (millions)
237.9 249.6
216.0 227.2
266.3
296.4 301.4
282.2 290.9 293.7
Transaction volumes have increased faster in
higher price categories, resulting in increased
commission dollars per transaction
1975 1980 1985 1990 1995 2000 2003 2004 2005 2006
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Inelastic pricing
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Affordability
Source: Economy.com; Freddie Mac
It typically takes 2-3 years of sharp volume
declines before prices actually fall at a regional
level
Strong seller reluctance to allow prices to drop
driven by high transaction costs, significant
leverage, and large proportion of household
wealth tied to real estate
Strong job and income growth, coupled with
historically low interest rates, have made
housing relatively affordable
Home ownership rate (percentage)
64.5 65.5 63.5 64.1 65.1 67.5 68.6 69.2 69.0 68.9 67.8
1975 1980 1985 1990 1995 2000 2003 2004 2005 2006 2007
Lessons from the US
All downturns over the past 25 years have had
strong “bounce back” periods post-correction
Existing single family home sales-value (% variation y-o-y)
80’s down cycle
34%
90’s down cycle
35%
19%
40%
27%
11%
Average 30-year fixed mortgage rate1: 13.45%
Average unemployment rate1: 7.3%
Real GDP CAGR1: 0.9%
9%
-12%
Total rebound
= 49%
-13%
-15%
5-year 4-year 3-year 2-year 1-year 1st year 2nd
3rd
4th
5th
year
year
year
prior
prior
prior
prior
prior decline year
00’s down cycle
13%
20%
11%
19%
4%
9%
Average 30-year fixed mortgage rate: 7.19%
Average unemployment rate: 4.6%
Real GDP CAGR: 2.6%
5-year 4-year 3-year 2-year 1-year 1st year 2nd
prior
17%
20%
7%
8%
Average 30-year fixed mortgage rate: 10.05%
Average unemployment rate: 5.9%
Real GDP CAGR: 2.3%
7%
-10%
-2%
5-year 4-year 3-year 2-year 1-year 1st year 2nd
prior
prior
prior
prior
prior decline year
11%
prior
prior
prior decline year
16%
18%
21%
Total
rebound = 68%
3rd
4th
5th
year
year
year
9%
16%
18%
21%
3rd
4th
5th
year
year
year
NAR 20082009 Forecast
14%
Average 30-year fixed mortgage rate: 6.04%
Average unemployment rate: 5.1%
Real GDP CAGR: 3.3%
7%
-9%
-13%
5-year 4-year 3-year 2-year 1-year 1st year 2nd
-5%
3rd
4th
prior
prior
prior
prior
prior decline year
year
year
2001
2002
2003
2004
2005
2008
2009
2006
2007
11%
Total rebound
= 29%
Current down cycle
1%
prior
9%
Source: NAR historical transaction volume based on average homesale price (forecasts are median price). Note: Cycles defined as 79—84; 88—93; 99—04; 05—10
1 Mortgage rate, unemployment rate and GDP refer to 5-year period (two years prior until three years after correction); current cycle refers to three year period (two years prior and one year after correction)
The UK Property Market
– ‘Back to the Future’
So where do we go from here?
Bank of England Mortgage Approvals for New House Purchase (not
seasonally adjusted) (LTM 000s)
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Transaction levels
1,500
1,400
1,300
1,200
1,100
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House prices
1,000
900
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Availability of mortgage finance
Jun
Mar 08
Dec
Sep
Jun
Mar 07
Dec
Sep
Jun
Mar 06
Dec
Sep
Jun
Mar 05
Dec
Sep
Jun
700
Mar 04
800
The UK Property Market
– ‘Back to the Future’
We all needed the Wake-up Call!
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Lenders
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Builders
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Intermediaries
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Consumers
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Regulators
The UK Property Market
– ‘Back to the Future’
Adapting to the New World – 2 Wrongs don’t
make a Right!
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We all have to charge what our
products and services are worth!
Putting each other out of business
will only lead to more misery!
Risk : Reward pricing has always
been sensible!
Greater oversight is necessary!
The UK Property Market
– ‘Back to the Future’
Surviving the Crunch
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Don’t simply hope for the best, plan for a more
sustained downturn
Remove costs immediately, beyond where it hurts
Everyone back to the front line, every pound of revenue
matters
Focus on the positive aspects of the market. We are not
at the top of the last cycle, we are at the bottom of the
next cycle!
The UK Property Market
– ‘Back to the Future’
The Future
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The housing market is leading us into recession and it
will lead us out of recession
Intermediaries will remain the dominant arrangers of
mortgages
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House prices will continue their long term upward trend
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What doesn’t kill you will make you stronger