The Rock of Gibraltar has sunk. Since mid-1988 flat and house prices in London have come down by up to 20%. And with the impending threat of job losses and more forced house sales, the suffering could be prolonged. But happily the sinking has also set a new flotilla afloat. At last first-time homebuyers are looking at spending 45% of their income instead of 50% in monthly interest payments. Recent signs suggest too that prices are bottoming out, and predictions have even been dared of a slight, but possibly short-lived, rise in the second half of 1991.
Savills director Paul Tayler, like many other estate agents, is of the opinion that "prices are about as low as they're going to get". Now is a good time to buy, although spring, the traditional time for house trading, could offer a wider choice.
Overall, house investment has always been attractive: for the tax perks, the capital growth and the pleasure of having a roof over your head. In the next decade, however, the bonanza will be considerably less. Rather than seeing the up to 20% premium slapped on prices in the 1980s by the baby boomers, the 1990s will be slow and steady. Still, Halifax Building Society is predicting a doubling of prices in the next decade.
A country home is more about having money than making it, it is true. Savills executive director (country homes) Ian Stewart makes this point more subtly than that: he talks about lifestyle, a few acres, tennis, swimming ... But it is also a solid investment. Nonetheless, in the past eight months the crunch has been felt here too. Prices have come back 15 to 25%, which makes it, Stewart says, a clear buyer's market. The best shopping will be from February onwards, when a fresh crop of the ivy-wrapped stones comes on to the market.
Castles, Stewart says, are "few and far between". But if you have £17-20 million upwards to play with, a rare opportunity is now yours: Herstmonceux Castle in Sussex, former home of the Royal Greenwich Observatory and smack on the Greenwich meridian.
Bonds and cash.
Prudential chief executive Hugh Jenkins' declaration that his funds are spurning bonds in favour of equities and cash may not be typical, but it is indicative of present moods. Cash rates at near 14% for short-term money market deposits have eclipsed the recent one-year gilt yields of 13% and 10-year yields near 10.5%. However, as interest rates fall this discrepancy will vanish and rising bond prices will attract investors back. Government bonds or gilts are a traditional recession hedge and the present price weakness is a good buying opportunity, particularly if you want certainty in uncertain times. If you want to stay liquid, stick with cash.
SG Warburg's director of international bond research, George Magnus, says that in the UK the balance of risk-reward is best in the short-dated bonds - up to five years, and recently yielding 10.8%. As interest rates come down, their prices will shift up more quickly than the longer-dated bonds (which also suffer from political instability). Britain's high inflation rate, however, makes the European market an even better bet. With UK inflation over 10%, the real yield on bonds here is just over 4%. In France this is about 7%. Market pressures to lessen this difference promise better capital returns on the French bond price and possibly on the currency exchange rate. Additionally, as Europe joins the slowdown, continental bond prices will rise. Magnus likes the longer-maturity French bonds best for a minimum of risk and a good return. For the private investor a flexible fund manager is his best ticket to a complex market.