Downturn without a downside: by Charlie Ellingworth of Property Vision

It’s a funny world. We are now reckoned to be in the worst recession since the war with output down 4.9% since the beginning of 2008 and unemployment steaming towards two and a half million. Yet Goldman Sachs announced record profits and prices for Kensington property have increased by between 10% and 30% since October last year - depending on whose figures you believe. This is as counter intuitive as particle physics excepting, perhaps, the news from Goldmans: the quip going round New York trading floors is that when the nuclear holocaust strikes, there will only be three things left - cockroaches, Keith Richards and Goldman Sachs.

There are mitigating statistics of course:

unemployment is concentrated on those aged between sixteen and twenty-four - not big property owners. But the explanation for this apparent paradox surely lies in the current ultra-low level of interest rates that are designed to produce no pain - and none is being felt unless you’ve lost your job or are a long-only fund manager. Someone once said of the Fauré Requiem that it was a requiem without a Last Judgement: at the moment the recession in London seems to be a downturn without a downside and nothing like the brutal squeeze between interest rates at 15% and falling asset prices that we saw in the early 1990s.

The market at the top end is surprisingly buoyant – mainly for London property, but more recently in the country as well. London has been characterized by plenty of buyers, many of them with dollars or euros in their pockets, but very few sellers at all levels. Our sub £1m team in Property Vision’s London office have been particularly frustrated. Until June there was a pattern that would have suggested that the further you got away from London (and those dollar/euro buyers) and into sterling denominated second home territory, the worse it was: Kensington was a sellers’ market but Salcombe belonged to a few brave buyers. So pronounced was this at the beginning of June, that there were only three houses (as opposed to landed estates) that had sold for more than £5million over fourteen counties. This has now changed and confidence seems to have rippled out from London with deals being done everywhere - for the best houses anyway.

The nagging feeling is that this can’t be right with headlines as bad as we’ve had to get used to over the last two years. However the argument goes - and it’s not lacking in logic - that when every other home for your money is volatile in the extreme, or paying you nothing, then property is as good a place as any for your money. This has certainly been the case this year. Also houses are things to live in and most people fall into the category of home owner rather than property speculator.

Whatever happens to interest rates, lending to everyone is still at a relatively low level as banks shrink and repair their balance sheets for the inevitable next wave that will have to be dealt with in the form of the commercial property market and consumer debt. The commercial market is down 44% from the peak - which means, effectively, that any property deal done over the last five years is now underwater - with the equity wiped out and the banks left holding covenants that are not in their interests to enforce. The banks’ P&L accounts are looking reasonable as long as the tenant keeps paying the rent and interest is flowing. Their balance sheets are another matter and it is unlikely, in the circumstances, that the lending taps will be opened fully for the foreseeable future no matter how much the Bank of England or the Government might wish it.

As we have seen this year, even if the green shoots turn brown there won’t necessarily be a wilting of the top end of the property market. For every debtor just holding their head above water, there is a creditor with money in the bank and looking for a home for that cash - or a home to live in. As with most other markets it’s likely that volatility will be the name of the game - in activity as much as prices. When sentiment changes in response to an external shock, the market simply dries up with both buyers and sellers sitting on their hands if they can.

We will almost certainly see more of that over the next few years.

Charlie Ellingworth is a director and founder of Property Vision, the market leader in advising buyers in London, the country house market and France.

Property Vision is now a subsidiary of HSBC Private Bank (UK) Ltd. www.propertyvision.com