2010 is shaping up to be a year of change for the country, not to mention the housing market and more specifically the survey and valuation industry. Ross Bowen of Connells Survey & Valuation looks at the year ahead
The long awaited general election seems likely to take place in May, if not before. Whether it is the Conservatives Labour, or the Liberal Democrats that take up the reins of power, the new government will be inheriting a housing market in transition.
2009 was undoubtedly a difficult year in terms of both transaction levels and property values, but it improved as the year progressed. As bank and building society lending dried up, transaction volumes continued to decline in early 2009. Land Registry data reveals that transactions were 46 per cent lower in January 2009 than January 2008 (26,743 compared to 57,861), and less than a third of the number in January 2007 (87,687). As a result, the number of reports we conducted in January 2009 fell proportionally. However, since January 2009, there has been a slow recovery in the monthly number of transactions completed. In September 2009 (the latest available data), there were 53,482 transactions - a quarter higher than in the same month in 2008. Correspondingly, we’ve seen gradual improvement in the volume of valuations, conducting 50 per cent more in November than in November 2008.
House prices too made steady progress following a trough earlier in the year. According to Nationwide, in February 2009, house prices dropped to their lowest since April 2004. Since then, things have been picking up. Nationwide state that house prices have risen every month since April, and by 5.9 per cent over 2009 - recovering some of the equity lost since 2007.
Despite this trend of recovery, it’s too soon to say the housing market is out of the woods. Funding and mortgage availability remain heavily constrained. Purchase and remortgage transactions are still well down - in October alone, the number of remortgages was less than one third the number in October 2007. Unemployment too has played its part in holding back recovery, and with 2.49 million out of work – unemployment will continue to curb significant increases in market activity. Whilst we weather these conditions, there will inevitably be subsequent knock-on effects with lower overall valuation levels.
But, activity levels are on the up and we have established trends to support this. 2010 will however introduce some additional factors that will impact the industry and the speed of recovery. The general election, and subsequent post-election policy changes will provide a new set of challenges for the market. Whilst the quantum of impact is by no means certain, the mere run up to the election will cause a distraction and uncertainty in the housing market.
Policy change
Policy change is likely post-election. For instance, it will be the prerogative of the new government to evaluate the success of previous initiatives to regulate the markets – and decide which to abolish, and which to tighten. In October 2009, the FSA published the Mortgage Market Review, which set out a plan to become more interventionist in its approach to mortgage lending. Under the planned regulations, self certification mortgages will be banned, buy-to-let mortgages regulated and mortgage advisers made directly accountable to the FSA. The Treasury is due to close its own consultation paper in February, which is likely to recommend extending the FSA’s scope to second charge and buy-to-let mortgages. Whilst some of these measures are welcomed in certain quarters, many foresee further hurdles to enabling and stimulating house moves.
There are question marks as to whether tighter regulation is the best way forward. Would regulating mortgage lending and advice two years ago have helped mitigate the housing - and lending - market downturn? Probably not. We have already seen a shake-out of lenders in the market, and those that remain active have significantly tightened their credit and risk stance alongside lending and valuation policies.
We have also seen the demise of many other firms servicing the industry, including less robust surveying businesses, many of which have left lenders fully exposed through failing to have adequate ongoing PI insurance. This will continue. Adding further regulation not only runs the risk of making mortgage finance more difficult for first time and other buyers to access, but it could make it more expensive as the associated costs are passed on to consumers.
In fact, we have gone from one extreme to another. The lack of mortgage finance availability has held back the recovery of the housing market. Although we have begun to see signs that higher loan-to-value mortgages are being offered once again by lenders, the size of deposits required by first-time buyers is still often prohibitively high. For the industry to achieve sustainable improvement, we need further coherent measures from the government, FSA and lenders to enable more people to move more easily.
HIPs
The looming prospect of the general election - and the political distraction it will provide - is likely to impact the market. The number of transactions will be affected in the short-term as many vendors and homebuyers will be waiting to see whether a new government will add incentives for borrowing, as well as for house purchase and sale. For example, with the abolition of Home Information Packs on the agenda, some vendors will be willing to wait to sell their property if there is the chance they will be able to save money in a few months’ time.
Grant Shapps, the housing spokesperson for the Conservatives said that, if they form the next government, HIPS “will be gone in a matter of weeks”. Typically, a HIP can cost a vendor between £300 and £400. Mr Shapps believes this cost acts as a disincentive for vendors to sell, slowing recovery of the market. In all likelihood, we’ll never manage to establish what role (if any) HIPs played in the housing market slowdown. They had the misfortune of being introduced at the exact time the housing market fell, and have been unable to escape the bad press by association ever since.
However, HIPs are not without merit, and they do provide useful information to the consumer although not, of course, a valuation. We have seen that providing core information and documentation relating to the property purchase from the outset shortens the period between the offers being accepted and the exchange of contracts by seven days. Whether or not HIPs are beneficial to the housing market in the long-term, in the run up to the election, until their future is confirmed, transaction levels and subsequent valuation activity may be adversely affected.
EPCs
Another requirement affecting the housing market is the energy performance certificate (EPC), currently mandatory in HIPs. Some people have suggested EPCs are irrelevant and unlikely to influence a buyer’s decision, and merely place an additional bureaucratic burden for home sellers. Another criticism is that they are an additional financial burden for landlords to bear.
However, they do benefit the consumer. Tenants, for example, don’t go through the same emotional process as buyers when choosing somewhere to live, so practical considerations such as bills rank higher for them. From the EPC, tenants can estimate running costs of the property, which may influence their decision to rent one particular home rather than another. In the final resort, of course, EPCs are the means by which the
Energy efficiency
Energy efficiency is a wider issue that carries significant political weight and resources, and will continue to do so in the future. The government has offered incentives, such as tax offsetting for landlords in the Landlord Energy Saving Allowance, and grants for homeowners in The Warm Front scheme, to act on EPC recommendations. This has boosted investment in home improvement, as landlords and homeowners look at reducing not only their carbon footprints, but also their monthly heating bill, as well as supporting property values.
Following the Copenhagen Climate Summit in December 2009, a future government is likely to offer further encouragement and incentives to build more properties with lower levels of carbon dioxide emission. While measures taken to reduce the environmental impact of our homes are to be applauded (and will be welcomed by the average homebuyer), this is not without difficulty - particularly in 2010 as public finances come under extreme pressure.
Cost is also an issue for the consumer. Eco-homes are more fuel efficient over the longer term, but they can be more expensive to construct, and command a premium price. As they become more mainstream, the industry will need to work closely with lenders to ensure lending and valuation policies are developed alongside this and the newer methods of construction.
Valuation methods
Looking at valuation methods, the evolving housing market in 2009 saw continued change in the dynamics between AVMs and inspection-based valuations. Lenders have been reconsidering their reliance on AVMs and in particular their use in the place of physical property valuations. CML research in 2006 concluded that within five years, 40 per cent of all valuations done would be by AVMs. But by 2009, it was apparent that such a major change was just not happening.
In a slower market, where house prices have fallen significantly, banks and building societies are seeking ways to minimise risk further by scrutinising their lending criteria and associated processes. This has understandably resulted in less use of AVMs for new business. While they do have their place, AVMs by their very nature do not replace the quality advice gained by having property thoroughly inspected internally and externally by a qualified surveyor familiar with current local market knowledge.
Whilst AVMs are infrequently used as the basis for lending decisions in isolation, they do offer other benefits. AVMs are increasingly being used by lenders and advisers to undertake auditing of existing portfolios, and those involved with due diligence activities on mortgage book disposals and acquisitions. With a tighter regulatory environment plus the need to minimise future write-downs, lenders are also seeking to periodically re-appraise the value of loans. AVMs can provide a cost-effective way of doing this without undertaking individual property inspections, although these are often used alongside a surveyor-based inspection where circumstances dictate.
Looking ahead
2009 was a challenging year for the housing and surveying markets and 2010 will be no different. Whilst confidence is being restored in some areas, uncertainty and difficult trading conditions remain. We have seen the demise of a number of small and medium sized survey and valuation businesses, and this has resulted in many lenders being left with no or inadequate PI insurance cover on properties valued by these firms. There is naturally a migration towards employing businesses that are financially robust and whose business model is sustainable. Even where firms are able to secure adequate ongoing PI cover, the rising cost of this will bring into question the ongoing survival of others. One thing is clear – it is imperative that short cuts are avoided and risks are effectively managed to ensure delivery of quality survey and valuation services needed by the market.
At least 2010 has started with a brighter outlook than 2009. Numbers of valuations are considerably higher, and we expect the established recovery trends to continue. However, we cannot ignore the challenges in 2010. With continuing funding and mortgage constraints, questions over the impact of mortgage regulation, and the changing political climate, the housing market will once again have to demonstrate its ability adapt to the another year of change.
Ross Bowen is managing director of Connells Survey & Valuation
Date: 1st, February, 2010
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While this website is checked for accuracy, we are not liable for any incorrect information included. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions.
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