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Mike Goodman

June 2009

Prices will still fall but volume will increase...

THE recovery of share prices in estate agency and property service businesses continued over the last month.

Rightmove moved above 320p, following some broker recommendations and after revealing the fall in estate agency clients it suffered since early 2008 had finally ceased, while website business from lettings continues to grow.

LSL Property Services, owners of Your Move and Reeds Rains, reached 120p as one of its US institutional investors Sheffield Asset Management increased its holding to 11.2 per cent.

Another US institution, Harris Associates, owns 19 per cent, having built up some of this stake last year, at about 80p per share.

LSL has also appointed Mark Pain, retiring finance director of Barratts, the housebuilders, as non-executive director to replace Mark Warburton who steps down this summer.

Mr Pain has also held high office at Abbey National so he knows his way round the housing market, in bad and good times.

Shares in Savills have wilted a little to 265p, from a 2009 high of 300p, amid gloomy predictions about the world’s commercial property markets. But the trend in the group’s share price has been upward since January.

Obviously, City analysts have been excited about the housing recovery. Judging by Central London, prices and sales have been looking up.

But I still believe that nationwide, the spring recovery is more like a “dead cat bounce”.

There was pent-up demand, mainly fuelled by cash buyers and what I call “mature movers” — vendors and buyers who have low mortgages and high equity and so are prepared to trim prices to secure deals.

I also believe that falling prices at this stage of the cycle will not result in a fall off in transaction numbers, which is obviously good for the estate agency business.

This view seems also to be held by Goldman Sachs, whose housing market analysts predict prices will not bottom out until the second quarter of 2010 and that peak-to-trough from summer 2007 to summer 2010 prices will have fallen 30 per cent.

Some agents might say certain types of property such as one- and two-bedroom flats have already fallen by that amount.

More interesting are the transaction predictions as Goldman Sachs forecast transaction volumes next year will be 12 per cent higher compared with this year.

Prices will remain under pressure because of rising unemployment, the squeeze on incomes, shortage of credit and the fact that property values are still above the historic 3.8 times average salary.

Richard Donnell, director of research at market analysts Hometrack, believes the green shoots of recovery are confined to higher-value family homes, untouched by tighter lending.

New-build flats, where prices were fuelled by investment demand, have fallen by up to 40 per cent in price, but three-bedroom houses “have seen a less severe correction”.

Hometrack believes this year will prove to be the record low for housing transactions. Indeed for the first three months of the year they were running at the rate of only 476,000 per year.

Mr Donnell suggests 675,000 is a realistic forecast for this year, now there has been some recovery. Even so, it’s the equivalent of the average household moving only once in 30 years, compared with once every 16 years over the past decade.

I am quoting here only a few of the housing market predictions which appear with monotonous regularity.

I am sure there are “green shoots” but we are not yet “out of the woods”. Confidence has returned but housing finance remains in short supply even though interest rates are low.

Changes in exchange rates such as a weakening dollar or euro could choke off overseas buyer interest in prime London property. The election of a Conservative government could spread fears of unemployment into the public sector which has so far remained unscathed, while a downgrading of the UK’s credit rating could force the Bank of England to raise interest rates.

Stock market confidence has returned but still remains fragile while the European, UK and US banking system has still to mend itself.

Next month I hope to discuss Countrywide’s re-financing package, which received High Court approval in both the UK and the Cayman Islands last month and is now in place. Who are the winners and who are the losers from this debt-into-equity scheme?