Figures from property auctions show a steep rise in distressed sales and suggest there’s more gloom ahead for UK house prices.
The Essential Information Group shed a lot of light on the residential repossessions market with their RAPID newsletter – a joint venture with property consultants Allsops. The newsletter confirms horror in the new-build flat sector, with an average price fall of 26% over 23 months to February 2008, and a sharp rise in the number of properties being auctioned.
Back in 1997, a mere 8,000 residential properties were auctioned. Last year it was 18,000, accounting for 1.7% of all property transactions. Repossessions were 27,000 in 2007 but the Council of Mortgage Lenders has predicted a rise to over 40,000 this year. That means more will be sold at auction.
Auction sales are becoming better value
Not all auction sales are bargains, but a rising proportion of them may be. This is because back in 2005, only 5% of auction sales were by lenders who had taken over properties, but in the first quarter of 2008 the proportion had rise to 20%. These distressed sellers typically set a realistic floor price and take it if they are offered it.
Even in London, distressed sales are rising sharply.
Another measure of value is yield, and RAPID has some interesting data here too. Assured Shorthold Tenancies (ASTs) account for a steady proportion of auction sales and in these cases the rental income is known, so a yield can be calculated on the price at which the property is sold at auction.
Amazingly, the yield on ASTs bought at auction in 1997 averaged almost 25%, a figure that then fell steadily to a low last year of 7%. But again, the first quarter of 2008 has seen a sharp rise, with AST yields in the North rising to 9%. Given the ongoing rise in buy-to-let financing costs, it is hard to see any reason why yields should decline.
New build flats are the weakest link
As auctioneers, Allsops have a ‘glass half full’ view of all this. They point out that buying at auction was dangerous last year, with too many people chasing too few BTL properties, and that with more properties on offer and at higher yields, investors will have better opportunities in 2008 - provided they can afford to finance their purchases with lower levels of borrowing.
But even Allsops concede that there’s little likelihood of a recovery in the new-build flat market until 2009, and this remains the weakest link in the property chain. If too many units come up for sale and this pushes prices down further, there could be knock-on effects on the wider housing market, and in my view this remains the biggest risk to UK residential property prices in 2008.
