The Investment Property Databank’s (IPD) latest review of the performance of UK Commercial Property shows some improvement, although returns remain negative. Its monthly index for February 2008 saw a total return of -1 per cent over the month, still negative, but a significant improvement on the -1.6 per cent and -3.7 per cent recorded in the two previous months.

Angela Sheahan, IPD’s research manager observes that ‘The repricing of property eased in February, but this should not make us complacent. UK commercial property remains in its most rapid and severe correction since the early 1990s recession. Performance was remarkably similar across the three main sectors. Continuing the trend seen since July 2007, income return edged up in every sector bar industrials, where it remained at 0.5 per cent.’

She adds, ‘Industrials continue to deliver a slightly higher income return than retail and offices. We saw smaller falls in February than January across the board, with All Property capital value growth coming in at -1.5 per cent relative to -2 per cent in January and -4.2 per cent in December 2007.’

Residential resilience
There also seems to be some degree of resilience appearing in the residential housing market. Martin Ellis, chief economist at HBOS, observes, ‘House prices fell by 0.3 per cent in February. Prices in the three months to February, however, were marginally higher than in the previous quarter. Over the past year, the average price of a home in the UK has increased by £4,390 to £196,649.’

He adds, ‘While the housing market has slowed over the past six months, it is supported by sound economic fundamentals. Interest rate cuts by the Bank of England are also helping to underpin house prices.’

Ellis concludes, ‘We predict that house prices will be flat during 2008 as a whole. The number of people in employment, a very important driver of housing demand, has risen by 296,000 over the past year to a record 29.40 million. Lower interest rates are helping support the economy and the housing market. We predict that the MPC will cut the base rate at least twice more in 2008.’

Darker scenario
However, this rosy view of the outlook for house prices is not shared by Tim Brown, head of strategy at economic research firm Jewson Associates. He reports, ‘We expect house prices to fall by ten to 15 per cent over the next one to two years, but we do not believe the UK will see a crash in the housing market or a recession on the scale of that seen between 1990 and 1992.’

He adds, ‘Even if house prices fell 20 per cent tomorrow, the average house would still have doubled in value since the end of 1999. House prices were 5.8 times higher than average earnings in July 2007, way above the long-term average of 3.9 times, suggesting that house prices are 45 per cent overvalued. And even the less well-publicised relationship between the current level of house prices and the long-term trend suggests current prices are around 30 per cent above trend.

‘But in the past 50 years, actual house prices only fell for a brief period in the late 1980s and early 1990s. At that time, prices were around 35 per cent above trend – similar to today’s conditions. The big difference is that interest rates were then at historically high levels. Today’s interest rate levels are low by comparison. Rather than a sharp decline in prices, therefore, we think house price indicators could revert to more normal levels through a combination of time, lower mortgage rates and growth in earnings.’