A MARKETER'S VIEW ON THE UK PROPERTY MARKET

879296 — Fri, 04 Jul 2008 20:49:00 GMT

Property investors could do worse than read an article by Jeremy Bullmore.

One of the great and simple (and great-because-simple) observations of the late Milton Friedman was that there are four different kinds of purchase we can make.

1) First are those where we buy something for our own use with our own money. (Our weekly grocery shopping mostly falls into this category). Here we are concerned about price, but equally anxious about the quality of what we buy - after all, we expect to be eating it later.

2) Next come those cases where we buy something for our own use yet using someone else's money; (an example might be choosing a hotel when travelling on expenses). Here we are concerned by quality but, in truth, pretty nonchalant about price.

3) Next are those instances where we buy something for someone else to use but pay with our own money; (buying furniture for a flat which we are letting out, say). Here we are quite happy to let the quality go hang so we can save a few pence.

4) Last are those things we buy for someone else and which we pay for with other people's money; (as Milton was quick to point out, most government expenditure falls into this category). Here neither price nor quality receive the purchaser's full attention. You end up with a lot of overpriced ***.

Jeremy Bullmore developed this thought further when he suggested that, in any list of products which are successful but not very good, it is almost never the end user making the purchase decision. The wire coat-hanger, the electric hand-dryer, musak and the lousy wine you are given at most receptions - all of these fall into this category where "the person who cares isn't the person who pays".

To which category we can add a few billion pounds of new-build UK property.

I don't know if you have noticed this, but perhaps 50% of new-build property in the UK (and, come to think of it, Spain) is in the form of of large blocks of one or two bedroom apartments.

The only problem with all this seems to be that, in the long term, most people don't want to live in this kind of property. There are exceptions: the special conditions prevailing in the centres of very large rich cities and super-prime waterfront locations seem to justify a multi-storey approach. But, these few places aside, most Brits seem to have a strongly-held ambition to live in a conventional house. Indeed outside a few major cities, a fairly strong stigma attaches to any kind of high-rise living.

And yet developers aren't stupid. For as long as these developments were selling, they were almost certainly the most profitable way to develop a small to medium sized area of land. The only problem was that, while they were selling - and selling fast - they were not being sold to end users as places to live in. They were being sold as investments. Perhaps to people so desperate to get on the property ladder that they would buy anything. Or, more likely still, they were buy-to-let investors who were happy to accept a fairly small rent from indifferent tenants so long as the capital appreciation of the property was bringing in a nice 17% per year. With a couple of dodgy chums in the financial services industry, it was also possible to borrow sensational sums by misrepresenting your own salary and to use this money to buy perhaps four or five of these buy-to-let flats - a practice known amusingly as Lie-to-Bet.

Anyhow, if I am right, and if these apartment blocks are the equivalent of Jeremy Bullmore's coathangers - ie items for which no real love exists - then the price falls in this type of property could be quite spectacular.

Already stories are spreading of Leeds developments selling for £90,000 rather than the £250,000 asked just a few months before. A development in SE London has experienced a similar fall.

Interestingly I rather like high-rise living, and I spent five years on the eighth floor in Bayswater, loving the views this afforded of the skyline, the sunset and the approaching weather patterns. But when I first bought this flat most people saw me as insane.

I see nothing in demography to suggest that I am anything other than an anomaly in preferring living high up. I suppose household size is shrinking a little, which may be an argument in favour of the flat. But how many people really want to pay £350,000 to live in the middle of Basingstoke?

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A MARKETER'S VIEW ON THE UK PROPERTY MARKET