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Landslide!

Created:
20 May 2008
Written by:
Claer Barrett

There is already anecdotal evidence that land prices are slipping, but just how bad could it get? Historic data from the Valuation Office Agency's (VOA) residential building land index shows that in the property crash of the late 1980s, land values in the UK fell by an average of 46 per cent from peak to trough.

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London and the South East, which had risen the highest, predictably fell the furthest. But regardless of geography, the big picture trend from the last downturn is clear - land prices fall sharply, followed by a lengthy period of step-by-step recovery.

Charting the nadir of the last property cycle, land prices fell for an average of four years, and took a decade to fully recover to 1989 levels, not allowing for the impact of inflation. But there is worrying evidence in the VOA data to suggest a more bearish scenario this time around. Following a 15-year bull run, the peaks of this cycle have been far headier than those of the past.

In the last five years, average land prices across the UK have more than doubled, rising by an average of 121 per cent. The increasing density of new build developments, notably city centre apartments, has acted as an accelerant to growth as more dwellings can be crammed onto a plot. The Home Builders Federation reports that 46 per cent of new build starts in 2007 were apartments, compared to just 21 per cent in 2000.

This partly explains why the most stratospheric rises in land values this cycle have occurred in the North East, North West and Yorkshire. The cities of Leeds, Manchester and Newcastle have witnessed apartment construction on a scale never seen before, to the extent that oversupply has already impacted negatively on pricing.

Earlier this year, Taylor Wimpey decided to mothball a major development in Leeds due to difficult market conditions. Increasing casualties from the buy-to-let boom means it is not unheard of for repossessed new build properties to be auctioned off at a 50 per cent discount to the original sale price.

Logic suggests that having risen the furthest, the value of land in the northern cities will see the greatest 'peak to trough' reduction this cycle. Just how severe and sustained that drop will be remains to be seen - but housebuilders might end up wishing the ground would open up and swallow them.

Region Peak to trough fall in last cycle Years of negative growth last cycle Years taken to surpass 1980's peak Increase in land prices 2002-2008
Inner and Outer London 61% 4.5 13 75%
England & Wales (excluding London) 54% 4 11.5 110%
South East 67% 4 10.5 62%
North East 9% 3 9.5 287%
North West & Merseyside 29% 3.5 9.5 198%
Yorkshire & the Humber 34% 3 9.5 211%
East Midlands 56% 4 11 50%
West Midlands 41% 3.5 9.5 46%
Eastern 70% 4 12.5 46%
South West 61% 4 11.5 78%
Wales 50% 3 10 188%
Scotland 22% 2.5 6.5 182%
Average 46% 3 .6 years 10.4 years 128%

Source: Valuation Office Agency residential building land index

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