Re:locate magazine, spring 2007

The Property Picture

David Castle examines the state of the UK housing market, and finds that relocation today is about managing risk.

Even the most unflappable estate agent can sometimes be surprised. Earlier this year, a flat roughly the size of a snooker table went on sale for £170,000 in London’s upmarket Chelsea area.

Measuring 11ft by 7ft, the former janitor’s storeroom had a cupboard place for a shower and was described by the less-than-enthusiastic agent as, “incredibly depressing”.

And yet, despite having no lighting and a floor full of rubble, the flat was expected to attract numerous buyers, proving that the old adage still holds true: selling property is all about location, location, location.

It’s no surprise, then, that despite three interest-rate hikes in the last six months, property experts are still predicting a rise in house prices for 2007.

UK property website Rightmove is sticking to its forecast that house prices will increase 6% across the country this year – despite January’s shock interest rate increase.

Three-year low

The amount of properties up for sale in January was at its lowest for three years, and 18% down on the level of January 2006.

The comments from Rightmove echo that of some mortgage lenders and homebuilders, who expect a general shortage of housing to more than compensate for higher interest rates.

Rightmove says that house price rises in London are outperforming the rest of the country to such an extent that the average increase in 2006 alone in London’s top five performing boroughs now exceeds the total value of an average property for sale in England and Wales.

That average price, according to recent figures from the Department of Communities and Local Government, is now a whisker under £200,000 at £199,467. With the value of the UK’s total stock of residential property now £410bn, the value of UK homes is now 3.5 times greater than the value of the mortgages still outstanding.

Other experts are equally as bullish. According to the Centre for Economics and Business Research (CEBR), Britain's housing boom will continue in 2007, with average prices rising by £1,000 a month. The think-tank says it saw no evidence that increased interest rates would hit the cost of homes.

However, it did predict slower growth in 2008 and 2009 before acceleration again in 2010.

“The underlying fundamentals of the housing market continue to support prices,” says John Ward, one of the report's authors.

“Even though interest rates may act as a dampener on the market, people are spending considerably less of their incomes on mortgages than in the early 1990s. Furthermore, in many parts of the country, shortages remain acute.”

Another rate rise due

However, Ray Boulger, of independent mortgage advisers John Charcol, has already revised his predictions for 2007, following the rate increase – and the possibility of another one occurring sooner rather than later.

He says it was almost certain that the market would see another rate rise this spring, with the possibility of another quarter point hike later in the year.

“The danger of putting the rate up too far is that the Bank of England ‘over-eggs’ the situation and then, not only do you have to put rates down quickly, you also have to restore confidence,” he says.

“Three months ago, I forecast house price increases of 4.5%, but I’d be a little bit more cautious now. I certainly don’t see house prices falling on a national basis, but think that we will see the rate of increase slowly quite rapidly over the next few months.”

Contrary to some experts, he says there are already a few signs that the higher interest rates are having an impact. His views are shared by the Royal Institution of Chartered Surveyor’s South East director Trevor Hines. “Interest rate rises have started to cool the housing market,” he says. Consumers will begin to tighten their belts as finances came under pressure, but rising wages and employment will continue to boost the economy.

RICS is predicting interest rates to finish the year at 5.5%, a level that could impact on the housing market. “It’s still a sellers’ market, but if things slow down, that will change,” says Ray Boulger. “In three or four months, in certain parts of the country, we could move to a buyer’s market.”

GSPs on the up

This could be a big help to any professional looking to relocate. Beverley Dale, head of the relocation department at Countrywide Relocation Services, believes that, if the interest rates do have an effect on the property market, the number of people who will want support through a Guaranteed Sale Price (GSP) scheme will increase, because the time to sell on properties will be reduced.

“This is the all-important thing in relocation – once you make an appointment for a job, it’s about getting that person in as quickly as possible without any distractions,” she says. “People will be more reluctant to move. But, most of the time, when they come to us they’ve already decided to move. If they’ve accepted a job posting, they will have researched what they can buy in the new area. But it will have a different impact in different areas, depending on the local economy.”

Tim Rose, Managing Director at Connells Relocation, says he would be very surprised if the property market doesn’t experience a general slowing down. But, as far as relocation goes, “it’s a different dynamic – people have got to move either to where their job is or to where it might be going.”

He says individuals might choose to decline the job offer. “But the nature of relocation today is that people move because their employer is either shutting down a factory, rationalising a division or merging subsidiaries – they simply don’t have the option of politely declining the move.”

How companies choose to support their staff, he says, has changed. “They tend to be less generous today than they were five or ten years ago. This means they move fewer people – and spend less money on the staff they do relocate. Relocation is no longer a blank cheque.”

Whereas a GSP used to be the default option that all staff got automatically, now, says Mr Rose, “it’s almost the Rolls Royce option in the market”.

First choice

It’s the cheaper options that tend to be looked at first, however. And, with the rise in interest rates, the costs of GSP schemes have gone up for employers. Mr Rose believes that, if interest rates remain at the higher rate, companies will begin to notice their costs for GSP schemes are rising.

“They won’t move less people, because they’ve already cut back the numbers of relocated employees to a near minimum,” he says. “What they may decide to do is spend less on each relocation: many companies now only spend a fixed amount on each relocation, or they will have a tiered relocation package.”

Some companies will now offer a Marketing Assistance Programme (MAP), which is similar to a GSP scheme. The employee’s house is professionally valued, marketed by the relocation company that selects the estate agents, the house price is realistic and any offers are discussed with the employer. The difference is that there is no guaranteed price, so the employee can’t actually move until the house is sold.

However, with the involvement of the relocation company, the property will be valued realistically – and priced to sell in a short space of time. The MAP enables an employer to build in some checks and controls to minimise their costs, but also give the employee a fair price.

“Relocation today is all about managing risk,” says Tim Rose. “If it’s not managed properly, it can cost a company serious amounts of money. Our role is to help companies manage financial risk better than they do.”