The Housing Downturn: Picking up the Pieces: - A Guide for Estate Agents and Developers

137 Pages·2009·0.52 MB·English

by  Graham Norwood

Prelims:Prelims 4/3/09 21:12 Page i
The Housing
Downturn
Picking Up the Pieces
A Guide for Estate Agents
and Developers
Graham Norwood
2009
AdivisionofReedBusinessInformation
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Prelims:Prelims 4/3/09 21:12 Page ii
©GrahamNorwood,2009
ISBN978-0-782-0570-3
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Prelims:Prelims 4/3/09 21:12 Page iii
Contents
Preface......................................................v
1 Whatwereyoudoingon9August2007?..................1
Missedsignal1:fartoomanynewapartments...
andfartooexpensive..............................5
Missedsignal2:comparisonswiththeearly1990s ..........9
Missedsignal3:Countrywide’sclevermove ..............10
Missedsignal4:lenders’systematicdown-valuing.........11
Missedsignal5:propertyscams .........................14
Missedsignal6:thecleverdeals.........................16
Missedsignal7:affordablehousingwasnotworking.......17
Missedsignal8:thepaininSpain........................20
TheUKpropertycrisis:fromdownturntorecession........24
2 WhenEstateAgencyLostitsMojo ......................35
Estateagentsfallinglikeautumnleaves—allyearround...38
Conclusion............................................50
3 LearningtheLessons—DiversityandModernity ........53
Diversity—first,therentalsmarket......................58
Morediversity—thepropertymanagementsector ........60
Afterdiversifying,trymodernising ......................62
Conclusion............................................71
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TheHousingDownturn
4 DisasterfortheHouseBuilders.........................73
Barratt................................................75
TaylorWimpey........................................77
Bellway...............................................77
Persimmon ...........................................78
BovisHomes..........................................78
MeanwhileinLondon...................................78
...andeverywhereelse,too .............................80
TheRSLssayno.......................................81
GuestinvestandTheBeach—thenadirofpre-recession
developers? .....................................84
Conclusion............................................85
5 ANewBusinessModelforDevelopers?.................87
Problemswiththeexistingmodel1—toomany
apartments......................................92
Problemswiththeexistingmodel2—thehomesare
toosmall........................................92
Problemswiththeexistingmodel3—buildqualityis
notconsistentlyhighenough ......................95
Problemswiththeexistingmodel4—theyare
expensivecomparedtootheralternative
accommodationtypes ............................96
Towardsanewbusinessmodel..........................97
Otheralternativestotheexistingwayofdoingthings .....100
6 TheFuture—EveryoneRaisingTheirGame............103
Howlong?: ..........................................104
Whithertargets—andbureaucracy?....................105
Thenewnormal......................................109
Finallessons .........................................115
Index .....................................................119
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Preface
There are looks of deep concern on the faces of estate agents and
developersintheUK.Theyhavehadanextraordinarilybadtimewith
worse to come, it seems. However, talk with them and, sooner rather
thanlater,asmilemayappear.
The reason? Well, the housing market’s runaway train, with its
prices soaring from 1993 until 2007, was finally stopped; but not by
them.
A few tabloids and their readers may still think agents and
developersarethedevilincarnatebutmostofthecountry—no,make
that the world — blame the banks and not the property industry for
theslumpinhousepricesandthebroadereconomicmalaisegripping
theglobe.
Ifonethinghasbecomeagivenaswehittheseconddecadeofthe
21st century, it is that the banks and other lenders have been too lax,
too cavalier, too optimistic and almost certainly insufficiently honest
with investors, borrowers and each other. There is an absolute
imperative for them now to restructure their balance sheets to fund
moreorevenalloftheirloansfromdepositsandnotbyborrowingon
wholesalemarkets,whichiswheretherootsofthecreditcrunchlie.
Whatismore,whilethebankstaketheblame,itappearsthatthe
housing market has — we think — escaped suffering a wholesale
crash.Manywouldusethe“C”wordbutIbelieveitiswrongtodoso.
This book does not skimp on revealing how a few areas have seen
pricescollapsebyasmuchas50%,butIcarefullyavoidusingtheterm
“crash”throughoutthesepagesfortworeasons.
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TheHousingDownturn
ThefirstisbecauseIthinkthewordisinaccurateindescribingwhat
hashappenedtotheresidentialmarketwhenseenoverthelong-term.
If an average 30% or even 35% price fall for homes constitutes a
“crash”,thenwhathappenedtooilprices(downfrom$145perbarrel
to $40 in just two months in late 2008) would be described as a
cataclysmic collapse. But we know the longer-term trend for oil is
upwards, so just about no one uses the term “crash” for a relatively
short-termslumpinthatcommodity’sprice.
In2008,forexample,UKhousepricesfell12%to18%depending
on which index you use or believe. Over the calendar year, oil fell by
58%(andweknowitfellfarmoreifyoudonotlookatthewholeyear
and simply look at its highest point, in the early autumn, and its
lowest point, just before Christmas). Meanwhile, Sterling’s value on
world markets fell 24% in the calendar year and the FTSE-100 share
indexdropped31%.Againstthosemeasures,too,wouldyousaythat
housepricescrashed?No.
Even now I believe that residential prices, like oil, will rise in
value over the long-term and within the next decade prices will
surpass those seen at the recent peak, 2007. Classic capitalism may
have its huge weaknesses but the shortage of homes within the UK
meansthatalackofsupplycomparedtodemandwillpushpricesup,
notwithstanding the over-supply that exists in some areas of the
country.
ThesecondreasonIdonotusetheword“crash”isbecauseafew
ofmyjournalisticcolleagueshavedebaseditsvalue.
Most business, finance, property and industry writers have a
decent enough understanding of the housing market and so have
usually avoided the “C” word in recent years. However, a few hacks
havetakentheeasywayoutandextrapolatedoneadversehouseprice
indexoroneexampleofadistresssaleintoapermanenttrend.
Inevitably, that meant “crash” appeared in a small number of
headlines, and equally inevitably that meant some less sophisticated
propertyinsidersstartedblamingthepressratherthananyoneelse—
eventhebanks.
Soifyouhavegoneasfarastobuythisbook,thelikelihoodiswe
can agree on two things at this early stage: the UK housing market
suffered an unruly downturn but not a crash, and the root cause lies
withthebanksratherthanthepropertyindustry.
Butbeforeweallengageinagrouphug,thinkaboutthis.
Manyagentsanddevelopersfellbythewaysideinthedownturn
years following late 2007. But did they have to? Were they as well
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Preface
preparedandappropriatelystructuredastheycouldhavebeen,ahead
ofwhatwasaninevitabledownturn?
Of those agents and developers who struggled through the
slump,aretherelessonstheycouldteachtherestofusregardingtheir
businessmodels,theirattitudesandtheirskills?
Ithinkso,becauseitwouldsurelybeamistaketosimplywaitfor
an upturn and assume all will then revert to the same world that we
inhabitedbetween1993and2007.
That world will clearly not be the same, and estate agents and
residentialbuildersmaywellsuffermoreandforlongeriftheydonot
use the current malaise as an opportunity to reconsider and reshape
howtheywork.
This book does not pretend to have complete answers, but is
perhaps most useful in raising questions — the classic role of the
journalistduringtheages.
Mypositionisonewhichhasmanyadvantages.
As a freelance journalist writing solely about residential property
for more than a decade now, I have chronicled the growth in the
industryinrecenttimes.Itseemedaverybasicbusinessbackinthemid-
1990s. It was before the biggest surge in buy-to-let; before large-scale
international property ownership and investment; before the internet
revolutionised sales, searches and buyer awareness; before Home
InformationPacks;beforetherise(andfall?)of“citycentreliving”.
But the biggest advantage is that although I have an
understandingoftheindustryIalsohaveanoutsider’sview,weighed
down by neither the workload of the agent nor of the developer. My
positionalsoavoidshavingtobeunnecessarilyrespectfulofindustry
processesjustbecause“that’showthey’vealwaysbeendone”.
So that is why it appears clear to me that many agents and
developerscandomoretoprotectthemselvesfromthenextinevitable
downturn,wheneverthatmaybe.
If that protection had been in place five years ago, perhaps more
industryplayerswouldhavespottedthesignalsthatweremissedand
which we try to identify in Chapter one. Then, perhaps more agents
andbuilderscouldhavesurvivedthefatethatbefellthem,chronicled
inlaterchaptersofthisbook.
What are those forms of protection? What could the property
industry have used: new technology, taken tips from other industries
to better shelter itself and perhaps even build business in the future?
Welookatallthat,too,beforeweassesswhatthefuturemighthold—
goodandbad.
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TheHousingDownturn
The “we” in question are the scores of property analysts, estate
agents, developers and other industry insiders who kindly gave me
theirtimeandviewssincethestartofthedownturn.Mythanksaredue
to them and also to Alison Bird, Commissioning Editor at EG Books,
andmyever-patientwifeHelenCrossfield.
The best parts of this book are down to these people: the rest is
downtome.
GrahamNorwood
March2009
viii
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1
What were you
doing on
9 August 2007?
Itispointlesstotrytoidentifythe“start”ofthecreditcrunch.
Some observers say it was in the spring of 2007, when the US
lender New Century Finance filed for Chapter 11 bankruptcy
protection — that heralded the start of global public awareness of a
problemwithsomethingcalledsub-primemortgages.
OtherssayitwasinJulythatyear,whenBearStearns(remember
that company?) told investors in two of its hedge funds that they
wouldnotbecompensated,becauseotherbanksrefusedtolendBear
Stearns any money for a bail-out. That was the incident which
signalledthereluctanceofbankstolendtoeachother.
Still others say the start of the crunch was not one event but a
protracted process dating from the late 1990s. That was when cheap
loans, some offered by those we can now safely describe as cheap-
suited wide boys, became commonplace across most of the major
economiesandespeciallyintheUKandtheUS.
In any case, the exact start date is not important. In the early
months of 2007, few in the British property industry had any
knowledgeofarcaneWallStreetlendingprocessesorthewayinwhich
the major US financial institutions bundled up debts and sold them
likeacut-pricecontagionaroundtheworld.
Even a year later, as 2008 dawned, the property industry had no
ideawhatwasgoingtohappen.
Most commentators were optimistic, buoyed by a Bank of
England interest rate cut in December 2007. They were anxious to
silencetheoccasionalsirenvoicepredictingdoomandgloom.
1