With the current plethora of contradictory information regarding the property market and whether house prices are rising, falling or whatever, the general public could be forgiven for thinking they were being duped by various authorities, providers and other sources of market data. My very strong piece of advice here is this: When you are given a piece of information, donít just look at the information; look at the motivation behind the person or organisation that provided it. With the best intentions in the world, no individual or company is going to tell you something honestly and openly when the ramifications and implications of the information are strongly against their best interest. Two very clear examples are ëthe state of the property marketí and ëhouse pricesí. The state of the property marketÖ A short while back, it was reported by a certain ëauthorityí that the market was picking up, their supporting evidence being increased online traffic across the main property property websites, the main one quoted by the said authority being Rightmove which is, incidentally, the best and most powerful property marketing website by far. They concluded that the market was improving because more people were looking online at properties for sale.
This put me in mind of a lesson from a mentor, who happened to be a very successful retail businessman, whilst walking down Oxford Street a few years back that has stuck firm with me. I passed a comment regarding how well the shops were doing, given they were packed and the street was a bustling sea of shoppers. He cast a look of disdain my way, saying ìAre you joking, this is very worryingî as I returned a somewhat bemused look; ìHow many shopping bags do you see people carrying?î And the point isÖ No matter how many people are looking or window-shopping, it is being able to match ability to desire when it comes to making a purchase that drives sales. If you have neither or only either, no sale will take place. And so it is with regard to the property market Ö The portal figures apparently showed a 60% increase in online traffic, so-called buyers, giving the impression that many would-be purchasers were looking for a property to buy.
However, a closer, more detailed look at the activity of these purchasers revealed a far bleaker picture; the number of ëclick-throughsí was down to around 20-25%. In retail terms, thatís a staggering ratio of ëserious buyersí to ëbrowsersí (ëtyre kickersí to the car trade) of about one in six! Let me explainÖ CTR (click-through rate) is the key indicator of the state of the property market. In retail shopping terms, the process goes something like this: The customer:-Walks past shop window, browsing displays and noting pricesWalks into shop and looks more closely at various rangesTries on garments of particular interestDecides if garment a) meets their requirements and b) is affordableMakes purchase and concludes transaction, becoming garmentís new owner As a shop owner, clearly, the sole objective is to get the customer to point 5, using whatever sales & marketing means are available to increase the likelihood of them doing so.
The equivalent process in the property market is as followsÖ The prospective purchaser:-Browses properties within their budget and in preferred location/area onlineëClicks-throughí on properties of interest for further informationArranges to view the properties that may be suitableDecides on most suitable property, either makes an offer and then speaks to a mortgage broker to ascertain affordability, or vice versaProceeds with purchase and becomes propertyís new owner Admittedly, Appleís iPhone advert footnote applies: ëSome sequences have been shortened!í As with the retail industry, point 5 is the sole determinant for the state of the market. Points 1-4 are largely irrelevant in the grand scheme of things and the worrying thing is that many ëwould-be buyersí are stumbling at points 2, 3 and/or 4. The two key reasons for this are, firstly, many know they will be unable to obtain a mortgage but, as with the retail industry, that doesnít prevent a little aspirational window-shopping. Secondly, and of greater concernÖ. They are NOT prospective purchasers! They are property owners researching what their home is worth and what comparable properties are on the market for. The sting in the tailÖ When properties are marketed at overly optimistic prices it gives other owners and potential sellers a false high in terms of their propertyís value and, coupled with some imaginative reporting on the part of various authorities and sources of market data, the true correction required in the market takes far longer to achieve.
With the open-wound of the credit crunch and the regularly repeated rubbing in of the consequential salt I donít need to explain the longer-term pain caused by delaying the inevitable! My opinion on the motives behind most lenders in terms of the information they provide to the public is that, if they were honest and open about the true state of the market, that in itself would be enough to cause another major financial crisis! How so? A lenderís security for outstanding mortgage loans is the property on which the mortgage is given, with many owners owning a very high proportion of their propertyís value in terms of the mortgage debt.
In many cases the debt will actually be more than the propertyís value, given that a vast number of owners were either given loans in excess of 90% of the propertyís value (LTV) or remortgaged to in excess of 90% LTV. Low interest rates have allowed many owners to cling to meeting their monthly payments by either their fingernails or the skin of their teeth, more commonly known as the overdraft and credit card. The lenderís real fear is that the security they have on their outstanding loans is already potentially significantly less than the loan amount itself and the proportional value of this security is falling daily and, once again in my honest but humble opinion, rapidly approaching the point of no return. Remembering LTVs in excess of 90% and with a drop in property values of between, say, 10% and 20%Ö Cue the Jaws theme music!
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