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  1. Property
July 14, 2009

Green Shoots? Red Herrings

By Spear's

Is the property market heading for a V-shaped recovery or merely raising two fingers in a V-shaped gesture at over-hasty investors, asks Ross Clark


developer sent me a press release recently boasting that it had just sold a tarted-up townhouse in Belgravia for £20 million. It was the first property sold in London for such a sum, it said, since October 2008, adding that this might be evidence that the prime property market had finally turned the corner.

The corollary is that the developer had actually been asking £25 million. Presumably, had it really been expecting a rapid turnaround in the London property market, it would have held out for the higher figure.

Yet there is some evidence that we have reached the end of the most dramatic phase of the property slump, in which prices fell consistently by around 2 per cent a month, month on month. Some of the property prices indices have even shown the odd rise in recent months, though these should always be interpreted with caution.

The main house prices indices, published by the Halifax and Nationwide, were never designed to be read month-on-month, only quarter-on-quarter. The hazards of taking them too seriously were aptly demonstrated recently when the newspapers put out headlines ‘shock rise in house prices’, based on a story that the Nationwide index had risen by 0.9 per cent in a month. The next day the Halifax index, which was supposed to be measuring the same thing, showed a 1.9 per cent fall.

More people, it is said, are looking at property this year than last, and the number of sales is up modestly from the dog days of 2008. But no one should get too excited about this. It would be unprecedented, not to mention bizarre, if property prices suddenly started rising when unemployment was increasing at a record rate. In fact, as far as the property market is concerned, the unemployment figures are worse than they seem. The number of low-paid jobs is holding up surprisingly well; professional jobs, the sort that fund mortgages, are in the steepest retreat.


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o one should expect to make a profit on a house this year. The question is what happens when the recession ends — possibly next year. It is tempting to look at what happened the last time the market was in the state it now is. In 1992, the housing market was deeply depressed. Then, after Black Wednesday in September of that year, came the ‘V’-shaped recovery, in which prices of the best London homes recovered as quickly as they had fallen.

Perhaps it could — if the credit taps were to be turned on once more, if the City were to recommence the manufacture of millionaires, and if the world were to return to the view that London is a financial safe haven. But those are quite big ‘ifs’. Apart from the BCCI — the so-styled ‘Bank of Crooks and Criminals International’, which went down in 1991 — we did not have a banking crisis in the early-1990s recession.

A long recession in financial services and London could always revert to being just another European capital. That need not prevent the housing market recovering, but it may mean property prices following a trajectory more akin to those in Paris and Rome.

There is, though, an elephant in the room — or rather a whale. If you are looking for a less optimistic precedent for our current situation, look at Japan in the early 1990s. Between 1980 and 1990, the Japanese property market had risen by 272 per cent — uncannily similar to that in our own property boom, between 1995 and 2007. Then the crash came.

Rather than entering a ‘V’-shaped recovery, Japanese property prices just kept on falling — for sixteen years on the trot. By 2005, they were 33 per cent lower than they had been a decade earlier. Finally, in 2006, after several stimulus packages, prices began rising once more, at least in the six largest cities. But come the credit crunch, the recovery was quickly snuffed out again: according to the Global Property Guide, by the first quarter of 2008 they were already 6 per cent down on their 2007 peak.

Admittedly, there are some differences between the Japanese and British property markets. The Japanese tend to treat their homes like cars, replacing them every few years. That is why Japanese property statistics, including the above figures, tend to be for land prices rather than buildings. But there are plenty more similarities. The fact that Japan is a crowded country with a restricted supply of building land has not underpinned the market.

Neither have rental yields of 7 per cent (compared with 2 per cent on a savings account if you are lucky) attracted a surge of investors. Bitten by property in the past, the Japanese continue to prefer to stuff their money in the bank.


efore the credit crunch put paid to the party, the property boom had spread worldwide. Wide-eyed British investors were flying off to Dubai, Thailand, Barbados for what they thought was a bargain.

But on their travels they missed the one country they really ought to have visited: Japan. Anyone tempted by talk of a ‘V’-shaped recovery in the London property market ignores the Japanese experience at their peril.

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