Flats For Sale, But Who want to Buy?

The Market for Flats in the UK.

In 2003, Leeds city centre had 1,800 apartment flats. By 2007, that figure (planned or built) had risen to 21,000. It was a remarkable expansion in flat numbers Yet, now the housebuilders are left with a high % of flats either empty or being let to students at a discount rate. It is symptomatic of a housing boom that has turned to bust.

Why were so Many Flats built when British people much prefer to live in ordinary houses?

In a period of rising property prices (upto 25%) a year, it didn’t really matter how bad or inefficient your investment was. Even the worst investment decisions were making profit. With prices rising at that rate. building more property, of any sort, was a no brainer.

Investor Market. Alot of these flats were targeted at investors (buy to let) rather than occupiers. Therefore the market for flats was always more volatile than ordinary housing. Now that property prices are falling, investors have much less incentive to buy flats to rent.

Government encouragement. Government have tried to encourage the building of ‘affordable’ ‘environmentally friendly’ housing. In this regard, city centre flats have the potential; in particular they have the advantage of not taking up green belt land, which can be so divisive. However, the problem is that homeowners have not shared the government’s enthusiasm for buying city centre flats.

Why are Prices for flats falling More Sharply than Ordinary housing

High levels of vacancy. 25% of city centre flats are unoccupied, but even more are temporarily occupied by short term renters. It appears that supply of city centre apartments and flats is greater than the demand.

Credit crunch. The shortage of available mortgages are hitting demand for flats, just like the rest of the housing market.

Deposits. In the boom period, some homebuilders used ‘tricky’ tactics to sell houses. They would add a mark up to house prices and then sell them at a discount to buyers. This gave a misleading impression that the buyer had given a deposit. With the problems of the subprime market banks are now requiring deposits of upto 40% which unexpectedly is deterring buyers.

Effects of Falling Prices

Homebuilders have cut back sharply on new building. For example, Persimmon has completely halted beginning new developments. This downturn in the construction industry will cause further economic problems and rising unemployment.

Any Good News?

The only bright note for investors in flats is that generally rentable incomes are holding up well as people rent rather than buy in the current climate.

Also, in the long term, the current number of new houses being built is insufficient to meet rising demand from a growing population; whilst house builders may face short term difficulties, occupancy rates will probably increase over time.

People may prefer to live in a semi detached with large back garden; but, it may be that people will just have to change their preferences. If the population increases as expected; it may be that high density city centre flats provide a realistic solution to the long term housing shortage.

See also:

• Why House Prices are falling
• Housebuilders | Home Truths at Economist.com