Sometimes it’s difficult to know whether the tremulous shuddering noise in the background is only a car driving past on the cobbles or it is actually the four horsemen of the apocalypse about to come streaming over the horizon. Watching the evening news is unlikely to make us feel any more secure about what the future holds, while for those digesting the daily reports on movements in the housing market, confusion and uncertainty reign supreme.
This air of unsettled anxiety has been exacerbated by the weather, which has served up a Summer fit only for wild fowl, and over and above the physical problems and hardships the flooding has created for affected home owners, it has also left them wondering what the long term financial implications will be if they want to move in the months and years ahead.
Clearly for those who have been affected, an immediate property sale is out of the question and there are other things for them to sort out and deal with in the present circumstances. But for those who want up sticks in the future, what impact will the flooding have had on the value of their property and what are the wider implications for the market generally?
No hard and fast rules
Reports in the national media claimed that as much as 80 per cent may be wiped off property values in the flooded areas, although the evidence that exists would seem to rebuff this suggestion.
It may well be the case that in the coming days and weeks someone wishing to sell would have to accept this kind of markdown if they wanted to sell immediately, including the remaining floodwater and dampness in the missives, but for those who can wait a little longer things should not be so desperate.
Indeed given the findings of ‘The Impact of Flooding on Residential Property Values’ report that was carried out by Liverpool John Moores University and the University of Wolverhampton for the Royal Institution of Chartered Surveyors (RICS) in September 2004, it appears the worst that home owners can expect is to see up to 40 per cent knocked off the value of their properties.
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This is not a figure that will make pleasant reading for those affected, but they can perhaps take heart from the fact that the mean devaluation uncovered for properties that had been flooded was actually 12 per cent.
The problem for many home owners in assessing how badly they have been affected personally by devaluation through flooding is that there are no hard and fast rules. There is no formula upon which a valuation rests and similarly so when it comes to knocking down the price in light of recent flooding, individual circumstance plays a huge role. What sort of demand is there for the property? How badly was it affected? Has it been flooded in the past and how likely is it to experience similar problems in the future?
The recent flooding in Gloucestershire and Oxfordshire was worse than the deluge seen in 1947 and so there is an argument to say that properties at the extremity are going through an event, which may only happen on a 60-year cycle. If this proves to be the case then the value of these properties should recover relatively quickly as people begin to put the potential risk in perspective and see it as a freak event, rather than one they should prepare for on a regular basis.
However it takes time for such perspective to develop and for valuations to recover quickly it is also necessary that tangible improvements are made to local flood defences.
As stated in ‘The Impact of Flooding on Residential Property Values’ report: “Previously flooded properties experience a progressive, though highly variable, recovery of value over several years provided there is no recurrence and the likelihood of recurrence is seen to be reduced by improvements to neighbourhood or specific property flood defences.”
The report also highlights the attitude of insurers as a major factor in the future value and saleability of a flood-affected property, as without such cover it is generally impossible to secure a mortgage.
Home owners can take some solace from the fact that the government and the insurance industry have come to a deal whereby competitive cover will be given to those affected in all but the most extreme cases.
As the Association of British Insurers explains: “If the probability of flooding is less than 1in 75, insurers have undertaken to provide cover through the competitive market.”
However it also accepts there are some who will be left out in the cold. “Unfortunately around half a million homes are not so lucky. And although flood defence schemes have been planned to help in some of these areas, the funding put aside by the government for flood management does not stretch to putting them all in place quickly.”
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For property owners in this category it is going to be a more difficult wait as they see what the weather serves up in the years to come and how potential buyers view the associated risk in buying a property that the insurance industry will only cover at a premium.
There is also the worry that for those who have been worst affected and pose the biggest risk of future flooding that insurers will withdraw flood cover altogether. Cover may be in place for buildings and contents making it possible to take out a mortgage, but the fact that cover in the event of flooding has been pulled would undoubtedly make it almost impossible for owners to sell on their home if they so wished.
Statistical information
Part of the problem remains the lack of hard and fast statistical information on the effect, regularity and cost of potential flooding and until better information is available it will remain difficult for home owners in hazardous areas to get the kind of cover at the cost they can afford.
As the RICS report states: “The study highlights the need for more accurate and finely tuned information to be publicly available to aid in the realistic assessment of flood risk to a particular property.
“The consequent reduction in uncertainty would permit insurance cover to be negotiated, albeit subject to premiums and exclusions to the most at-risk properties, and would focus the property owner’s attention on the necessity of flood contingency planning and flood defence measures, both at the neighbourhood level and to the property itself.”
Despite the obvious problems, Greg Heywood, founder of property company The Step, says that people should not worry, as the recent disasters are unlikely to put buyers off in the long term, in all but the most extreme circumstances.
He explains: “Over the past few weeks we have had many calls from people who have got their riverside homes on the market worrying that they will lose value or not sell at all. Flooding on this scale is fortunately very unusual so people selling their riverside homes should not panic. Around five million people, in two million properties, actually live in flood risk areas in England and Wales and it does not have a drastic effect on their value. This is just an initial reaction to the disaster. Eventually the prices will increase again.”
Given that the long-term view is that prices in flood affected areas will recover, it is unlikely that the recent UK deluge will have an impact on the wider property market as a whole.
Rising tide
Looking to higher ground and properties which have not been affected, there are a number of other issues at play which will be more influential in determining future house price inflation.
The most important of these is the rising tide of interest rates, which are beginning to bare their teeth and bite deeper into borrowers’ pockets. Back in Summer 2003, when the Bank of England Base Rate was a lowly 3.5 per cent things were good for mortgage borrowers who were able to borrow more than they ever had in the past.
However the tide has well and truly turned and with Base Rate sitting at 5.75 per cent, it is not surprising that things are more difficult for the average mortgage borrower. This has been reflected in a growing number of arrears and repossessions and figures from the Council of Mortgage Lenders (CML) show there has been a steady creep in those unable to meet their monthly commitments.
Commenting on the returns for 2006, the CML stated: “The number of mortgage repossessions rose from 8,140 in the first half of 2006 to 8,860 in the second half. This brings the total for 2006 to 17,000 – 65 per cent higher than in 2005, but broadly similar to 2001 levels, and roughly one in 690 mortgages.”
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Looking to the future, it added: “Back in December, the CML had forecast that there would be 18,000 repossessions in 2006, 2007 and 2008. However, the rate of increase in repossessions slowed down toward the end of 2006, resulting in a more positive out-turn than expected. But the CML is now forecasting that repossessions will rise modestly to 19,000 in 2007 and 20,000 in 2008.”
What was seemingly incongruous about the figures released by the CML was that as repossessions increased towards the end of last year, the number of mortgages in arrears actually fell.
However it seems this is due to the mortgage products that borrowers have taken out and the time lag that lies between a change in the rate of interest and when it actually affects borrowers.
Michael Coogan, director -general of the CML, explained: “The arrears picture at the moment is fairly complex. On the one hand, the wave of problems caused by previous interest rate rises has now worked through, so recently arrears levels have fallen. On the other hand, interest rates are rising again, and payment shock may be an issue for some this year as their existing fixed or discounted deals expire.”
The bottom line is that towards the end of the year it seems certain that interest rates will catch up with borrowers and the picture on arrears will fall into line with that on repossessions as more people begin to struggle.
Cooling inflation
In light of these problems, house price inflation at last seems to be cooling down again and figures from across the market clearly highlight this. In its June housing market survey, Nationwide said prices had stalled over the month and Fionnuala Earley, Nationwide’s chief economist, commented: “After surprisingly picking up steam in June, house prices were almost unchanged in July, and their underlying trend growth resumed a downward path.”
This was a view echoed by Halifax and although it claimed house price inflation over the month had been 0.4 per cent, the fact that is was the second month in a row where the figure had been below 0.5 per cent points to an ongoing slowing in the market.
Martin Ellis, chief economist at Halifax, said: “These figures indicate that house price inflation is slowing. The increases in mortgage rates and the persistence of negative real earnings growth in the early months of 2007 are expected to cause annual house price inflation to slow further over the coming months. Solid economic fundamentals and a shortage of housing supply will, nonetheless, continue to support house prices.”
There is no doubt there are some fundamental challenges facing the housing market from the problems at a local level with flooding, to the lack of supply that remains and the need to build new properties which are also sustainable in environmental terms.
Borrowers face continued uncertainty at the hands of the Monetary Policy Committee in its battle against inflation and the truth of the matter is that things will get worse before they get better.
However commentators and economists remain confident that the outlook is still positive and most will be hoping that RICS spokesman, Ian Perry, is right when he says: “A softer landing for the housing market is in store as we move into the Autumn.”
Perhaps it was only a car going past the window after all.
