Analysis of data and statistical methods

The term landed property covers such a wide range of types of land and buildings and interests therein that generalisation is difficult, but generally the demand for and the supply of landed property are relatively inelastic with respect to price changes.

An important factor that restricts supply of land and buildings is the need for planning approval for development. There are, of course, also natural limitations on the supply of land; the overall supply is fixed and the supply of land suitable for particular purposes is limited, but these natural limitations are overshadowed by planning limitations. Planning controls must be considered in detail when consid-ering the potential for development and change of use. In this context the following powers are the most important:

1. The power to allocate land for particular uses, for example, agricultural use or residential use. This allocation is shown in the development plans for the area. Thus, it would not normally be possible to erect a factory on a bare site in an area allocated for residential use.

2. The power to restrict changes in the use of buildings. For example, before the use of a house can be changed to offices, planning permission must be obtained and this permission will not usually be forthcoming unless the change is in accordance with the provisions of the planning policy for the area.

3. The power to restrict the intensity of use of land. Thus, the owner of a bare site in an area allocated for residential use is not free to choose between erecting on it, for example, a four-storey or a 15-storey block of flats. Any permission is subject to the further restrictions of building regulations which may negate or limit that which the planners would allow.

Thus, for example, if in a particular area in which all available office space is already taken up, there is an increase in demand for office space, this increased demand might be met by an increased supply in three ways:

1. conversion of existing non-office space to office use;

2. construction of new offices on bare sites; and

3. redevelopment of existing office buildings at a higher density.

In an extreme case, planning permission might be refused for all three. In such a case, in both the short and the long run, the effect of the increase in demand will be to increase the price of the existing office space to the point at which the high price so reduces demand as to equate it once again with the fixed supply.

In a less extreme case, where it would be possible to increase the supply by one or more of the three ways, some, perhaps considerable, time would elapse before the supply could be increased. In the case of conversion of existing buildings, it would be necessary to obtain planning permission, dispossess any tenants and

Principles of valuation 7 carry out any necessary works of conversion. The time taken would depend on the administrative speed of the planning authority, the security of tenure of the tenants and the extent of the works. With the other methods, planning permission would again have to be obtained, and with the last method, any tenants of the existing buildings would need to be dispossessed and the buildings demolished.

The erection of the new buildings could take perhaps one or two years. Thus, in this less extreme case the effect of the increase in demand would, in the short run, be to increase the price of the existing space. In the long run, as the new space becomes available, the price would tend to stabilise or fall. If the increased supply was sufficient to satisfy the whole of the increased demand the price might return to its former level, but if, as is more likely in practice, the increased supply was insufficient, or, if sufficient, was of a higher quality, the new equilibrium price would be higher than the old.

A reduction in the supply of a given type of space is difficult to achieve; the exist-ing stock can only be reduced by demolition or change of use. The loss involved in failing to complete buildings already started will usually be higher than the loss resulting from a fall in price, but their use might be changed during construction.

Although the demand for land and buildings is generally inelastic, the degree of inelasticity will depend to some extent on the purpose for which land and buildings are held and by the economic conditions at the time.

Elasticity of demand for any commodity or service depends on whether the commodity or service is regarded as a necessity and on the existence of satisfactory substitutes. For example, the demand for landed property for residential occupation can generally be regarded as a necessity and no satisfactory substitutes exist. So an increase in the price of living accommodation, within a limited range, would not result in any marked contraction in demand because a particular standard of such accommodation is regarded as a necessity and a caravan or a tent would not, to the majority of people, offer a satisfactory substitute. However, this would not be true if the increase were outside an acceptable range or times were less prosperous, when an increase in price would probably, subject to legal restrictions on subdivision and overcrowding, lead to economies in the use of living space, as occurred during the recession of the early 1990s. The effect of price changes on demand will depend on whether the demand is “need related” or “standards related”.

Buyers must be able to translate their desire to own into the act of buying. The ability to buy will usually depend on the availability of loans (mortgages) and on the policies of the lending institutions in respect of the multiples of income and the percentage of capital value (loan to value ratio) on which they will lend.

In 2008 the economy was overshadowed by a credit crisis, initially caused by defaulting subprime mortgagees in the USA, which had an international impact as the mortgages were traded world wide. Virtually overnight the lending institutions changed their policies by increasing interest rates where the loan to capital value ratio was high, and they withdrew all lending above a ratio of 80% where before they had been lending up to and in excess of 100%. The effect of this was to push

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residential prices down and, even though some support has now been offered by the government for first-time buyers, prices and market activity are not likely to recover until mortgage finance becomes more readily available and confidence returns to the market.

The majority of home buyers will normally pay only a small proportion of the price out of their own capital; the remainder is borrowed by way of mortgage from a financial institution such as a building society, an insurance company or a bank.

Sometimes this will be done because buyers prefer to invest the remainder of their capital elsewhere but, in most cases, buyers have insufficient capital to pay the whole of the purchase price. However, their income is sufficient to pay interest on the mortgage loan and to repay the capital gradually over a period of years.

Therefore, the ability of most buyers of residential property to make their demand effective depends on their ability to borrow money.

Over the years, the financial institutions have experienced extremes in rela-tion to money resources for lending which illustrate well the impact of effective demand on value. In the period 1970–1973, the lending institutions had plentiful sums available for lending, and borrowers were able to obtain mortgage sums for home purchase representing a large proportion of the price and at low rates of interest. This in turn led to a rapid increase in house prices as buyers competed fiercely for the houses available for purchase. At the end of 1973, the situation changed dramatically as lending institutions experienced a rapid fall in the sums they had available to lend.

In the following three years, mortgages became difficult to obtain, certainly for any substantial proportion of purchase price, and then only at high rates of interest, so that house prices actually steadied or even declined before returning to a slow rate of increase. This was particularly marked in the upper price ranges, which suffered most from the reduction in mortgage tax relief and in many cases failed to reach the levels of 1973 until 1976. In 1976 the situation began to ease and the market returned to that seen in the early 1970s.

This rapid increase came to a sudden end following the introduction of high interest rates in 1979, when the market virtually stopped, until the end of 1982, when a combination of low interest rates and aggressive lending policies once again led to a sharp increase in prices which continued, with one or two short pauses for breath, until the end of 1988. During this period prices rose by an average of 125%. This rate of increase was brought to a halt by a combination of a change of government policy in respect of tax deductibility of mortgage interest, changes in government fiscal policies and the economic effects of Iraq’s invasion of Kuwait. Multiple income relief for mortgages of up to £30,000 was withdrawn from 1 August 1988 (but announced in the preceding March), after which a combination of high interest rates and increasing unemployment caused a significant fall in demand and an actual fall in prices, so that by the middle of 1993 prices had fallen back to their 1980 levels. Prices continued to fall until 1995 when a recovery began to occur (the market had “bottomed out”), and by the end of 1996 had reached the levels of 1993.

Principles of valuation 9 The period from 1996 to 2007 saw almost continuous price rises, due again to low interest rates, an increase in the supply of money and a change in lending criteria. In effect, too much money was chasing too few properties, creating the perfect conditions for price inflation. This was coupled with a surge in demand from non-owner-occupiers, namely buy-to-let investors using borrowed capital, who were desperately seeking higher yielding investments because of the low yields available in the money markets. The credit crunch, which began at the end of 2007, led to a worldwide recession that caused house prices to tumble.

Similar affects have occurred in all sectors of the property market. The policy of financial institutions such as building societies and banks has, therefore, an important bearing on the effective demand for landed property.

Legislation often affects, either directly or indirectly, the supply and demand for landed property. The various statutes affecting different types of landed property are considered in later chapters but, as an example, the supply of smaller or poorer types of residential accommodation for letting was directly affected by the Rent Acts which both restricted the rent that owners could charge for their property and limited their powers to obtain possession. The removal of this regulatory system for new lettings in 1989 led to a sharp increase in supply which was matched by a sharp increase in demand due to inward migration from the enlarged EU, as well as from potential owner-occupiers who had been priced out of the market.

The other principal factors affecting the demand for landed property are mainly long term, so that their effects are felt only gradually over a number of years.

Some of the effects of planning in relation to the supply of land and buildings have been noted, but planning may also have important effects on the demand side. The creation of new towns, the extension of existing towns to accommodate overspill from the large conurbations and the redevelopment of central shopping areas are examples of planning schemes which may increase demand in and around the areas concerned, although they may reduce demand in other areas. Thus, a new shopping centre or supermarket may draw demand from adjacent properties and may diminish the demand for those properties.

Changes in the overall size, location and composition of the population will affect the demand for landed property. An overall increase in population, par-ticularly if accompanied by an increase in prosperity, will increase the demand for most types of landed property. The increased population must be housed and its increased demands for necessities and luxuries will have to be met through the medium of shops, factories, offices, hospitals, schools and playing fields. The movement of population from one part of the country to another will have the dual effect of increasing demand in the reception area and reducing it in the area of origin. Changes in the composition of the population also have important effects.

For example, a reduction in family size will decrease demand for larger homes, whilst an increase in the number of retired people may increase the demand for accommodation in the favoured retirement areas of the south coast.

Improvements in transport have encouraged people who work in towns to com-mute, sometimes over long distances, but as the number of commuters increases

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and transport facilities have become overburdened the process is being reversed, particularly where coupled with increased fuel and fare costs and overcrowded services. The older town centres have again become desirable places in which to live and there has been significant redevelopment of redundant offices, factories and warehouses, particularly in waterfront locations.

Technological developments have their impact on supply and demand. For example, changes in freight handling can render low-height and multi-storey ware-houses obsolete. Similarly, offices built in the early post-war years may be unable to accommodate today’s electronic requirements. Most recently, the biggest factor affecting demand for all types of property has been the impact of the recession.

Currently the issue is that of sovereign debt in Europe and its impact on the euro.

Such global factors have to be considered as well as domestic factors such as the possible revisions to the UK planning system. Markets react and, whilst the val-uer’s role is to interpret the actual impact on property prices, the valuer needs to be aware of the forces at work on a macro level.