If homes are shunned at auction, is that a hammer blow for all of us?

Laura Howard asks if house prices in general are going, going, gone as the bids dry up for bricks and mortar
Click to follow
The Independent Online

The residential property market took a turn for the worse last week but the evidence is likely to be missed by most homeowners.

According to the Royal Institution of Chartered Surveyors (Rics), just 57 per cent of the 7,669 homes that went up for auction in the last quarter of 2007 were sold for the reserve price. This figure was 12 per cent down on the same quarter in 2006 and marked the lowest success rate at auction for three years.

Most homeowners may feel safely detached from auction figures, but they have implications for the wider market. For a start, despite the dip in sales, the number of homes that went to residential auction was up 15 per cent on the year before, says Rics. That was due to repossessions which, the Council of Mortgage Lenders (CML) reports, reached 27,100 in 2007 – up 20.9 per cent on the previous year. Rics forecasts that repossessions could rise a further 50 per cent this year as a result of last year's rate hikes and the credit crunch.

But still more pessimistic commentators claim the new auction figures are proof that the wider market is destined for a crash. "The value of a property is not the latest monthly average but the price of the last one that was sold," says Jonathan Davis at website Houseprice-crash.co.uk. "If they are not selling at the current reserve prices, sellers have no choice but to reduce these prices and put them back up for auction. This process brings the value of all property downwards – especially as many auction bidders are now not from the trade but novice investors holding out for a bargain. Auctions are the retail market."

And that's not where the impact of the Rics figures ends. According to Allsop, the UK's biggest property auctioneer, around half of the typical 400 homes sold at any one auction have already been repossessed by lenders. With house values down and mortgage profits escaping through the back door, banks must recoup losses from somewhere and fears are mounting that this will be in the form of higher rates and stricter lending criteria. Ultimately, it may be the average homeowner – who has probably never been to an auction – who will be hit in the pocket when they try either to switch their mortgage deal or take out a new home loan when moving.

Oliver Gilmartin, economist at Rics, says: "While tighter credit conditions will be most acute for those with a poorer credit history, less generous loan amounts and the introduction of upper limits on some advances could equally hit the mid-tier of the market, which would increase the number of properties languishing on auction books."

A spokeswoman for the CML denies the new auction figures will have an impact on lending conditions as only a "minority" of repossessed properties end up being sold at auction anyway. "Lenders have to get the best price for a property, which often means they are marketed and sold through estate agents."

But Gary Murphy, a partner at Allsop, says the overall market is "considerably weaker" than the auction one. "Repossessed homes are often offered by private treaty first but go to auction when the price cannot be achieved."

Auctioneers also like to distinguish themselves from their rivals. "Sale success is a question of whether the auctioneer is giving the right advice to their clients about reserve prices," says Mr Murphy, adding that Allsop sold 88 per cent of its 415-lot catalogue in February and 84 per cent in December.

Broker Savills has also reported healthy figures. In a residential auction last month, it sold 75 per cent of stock, raising over £25m. Charles Smailes of the National Association of Valuers and Auctioneers adds that quarterly numbers are a snapshot of "times gone by" rather than an indication of the current market.

"I don't think that these figures reflect anything more than the uncertainty of that period – which would be October, November and December of last year," he explains. "The market was post credit crunch and still reeling from the American sub-prime and Northern Rock debacles. Auctions are a very public and honest evaluation of what is going on at the time – and that's why I am sure that the first-quarter figures for 2008 will be more optimistic."

However, with both the Halifax and the Nationwide reporting that house prices fell yet again in February, people can't be too careful. "Homeowners will need to be vigilant about meeting payments for all sorts of utilities, cards and loans," warns Melanie Bien, director of Savills.

"They would also do well to pay down their mortgage and reduce the loan to value if they have any spare money. This will make it easier for them to remortgage when the time comes."

Looking for credit card or current account deals? Search here