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In trying to forecast market movement over the next 12 months, the data sources I consult include many of the recognised industry bodies that the media accept as credible and accurate. Bodies like the House Builders Federation (HBF), the Royal Institute of Chartered Surveyors (RICS), the National House-Building Council (NHBC), the Halifax, the Nationwide, Rightmove, even the UK Government. But if you really want to get a feel of what’s happening out there, there is nothing quite like speaking to a group of sales negotiators. This qualitative feedback is so much more illuminating than data which simply reflects what happened weeks before. Sentiment among prospective buyers is so important. The speed people take to make a decision (dwell time), what they are prepared to pay, how they feel about the market. In my opinion, it is this type of data that offers the most reliable guide to how things are going to unwind as we move into the summer.

It is now almost universally accepted that the decline in the market has slowed dramatically and, in the case of prime properties or sites, there is already inflation in evidence. (Read the blog on Refracted Bounce for more on this) On the last weekend in May, the Sunday Times reported the return of Gazumping. This came as no surprise to many of us who have been witnessing more desirable property becoming harder and harder to find as the number of properties on agents’ books and available for sale generally, hit record ows. The May Issue of the excellent Savills Residential Property Focus also identifies the demand for prime property, especially in London and the South East. The combination of a very low number of second hand properties on the market (in April RICS reported the average level of stock of their member agents was just 69.3 – almost 20% lower than last year!), and the dramatic slow down in new build, will inevitably lead to a shortage of supply going forward.

The NHBC reports a stabilising market with first quarter new start applications 10% up on the previous rolling quarter, but look at the numbers – less than 18,000 and of these less than 10,000 were private sector! Around a third of what they were this time last year. We could well find that less than 40,000 new private sector homes get built in 2009, I’m not sure records go back to the last time that happened. And even if all the UK’s housebuilders suddenly have a ‘Road to Damascus’ moment and turn the throttle control back to full speed, their infrastructure is so diminished and their pipeline so long that it is unlikely it would have much effect on this year’s production anyway.

So, is it time to review the ‘Dash for Cash’ policy adopted by so many developers over the last 18 months? Generally the major players have gone a long way to re arranging their finances and the write-downs of the last two years have meant they are in a position to sell and trade profitably. Crucially, stock levels have now dramatically reduced. Sure there are still plenty of unsold flats in our towns and cities, and there is still the odd horror story out there about the crazy deals that have been done to move them on – always by someone else, but even these flats are starting to look an attractive proposition to investors who are struggling to find a decent rate of return in any other investment market. Well one with a commensurate level of risk anyway. Is it time to slow down the rate of sale?

There are two major black clouds on the horizon which block our clear view of the market over the next 12 months – unemployment and a lack of mortgage funds. Paul Samter, the economist at the Council of Mortgage Lenders (CML) warns against optimism – as do so many – he points out that although the deterioration in prices is slowing, activity is still at a historically low level – lower than at any point in the early 90’s. And he adds, ominously, "Limited lending capacity and the impact of further job losses are likely to act as a ceiling for how far the improvement can continue". Maybe Mr Samter, but those two factors are clearly going to affect certain markets much more dramatically than others.

The fact of the matter is that provided you’re able to find a reasonable deposit, 25% to 30% or more, a mortgage is not only relatively easy to come by, but it’s also cheap as chips in comparison with the average over the last 20 years. Combine that with buyer sentiment that reflects a new found confidence that we’ve reached the bottom of the market and certain sectors are virtually certain to see an increase in demand over the short to medium term. (It is also a remarkable coincidence how few down-valuations you see when there is a thumping great deposit in the transaction!) It is not terribly difficult to accurately assess which sectors fall into this category and it’s these properties that need to have their prices adjusted now. A gentle hardening of price to slow down sales rates and take advantage of the inflation that, I am certain, is already in evidence in many parts of the UK. I have spoken before about the danger of relying on averages to underpin policy decisions. Refracted Bounce is kicking in and developers have a duty of care to return best value for every plot. Now is the time to be selective. And now is the time for steady nerves.

The industry should continue to market secondary and tertiary product aggressively – albeit less so than of late – but we must identify prime product and slow down the sales rates to take advantage of the changing conditions. The very act itself will have an effect on the market, especially one that is around a third of the size it normally is. Not quite a self fulfilling prophesy, but it will doubtless have an impact.

For me this is a three stage project;

1. Assess and categorise all sites as primary, secondary and tertiary
2. Gently apply small incremental price increases to primary plots or sites
3. Constantly monitor movements in sales rates and the market and be swift to react

No-one can guarantee how any market is going to perform, especially in these volatile and unprecedented conditions. The risk of false dawns and plateaux as the market pauses for breath before it continues to fall (a little like the 90s) is undoubtedly a very real one. Unemployment has now moved past the 7% mark and is still rising and ‘on average’ prices are still falling by anywhere between 10% and 20% if we believe the Halifax and Nationwide. But, we shouldn’t be dealing in averages. Let’s get at the detail. After careful consideration of all available data, I am confident we will see price trends change at different rates for different property types and the industry must take advantage of the opportunity.

© Matt Fleming 2009