HOME ECONOMICS FOR THE NINETIES

Rising house prices are once again the hot dinner-party conversation. But look beyond the estate agents' smiles, and you will find thousands of people reeling from the fall-out of the last boom. On the eve of the general election, Leslie Gillilan tells you how to win at the property game

A COUPLE OF weeks ago Savills Interna-tional held its spring reception in London. Very nice it was, too. The setting was the Westminster Room at the gilded, neo- classical Lanesborough Hotel on Hyde Park Corner which, incidentally, used to be St George's NHS hospital. Beneath an oversized crystal chandelier, and a glazed atrium trimmed with hundreds of yellow roses, journalists mingled with property consultants (Savills International doesn't like the term "estate agents") in best bibs and tuckers and drawing-room-friendly mode.

A pianist and a pair of professional opera singers provided background atmosphere. Waiters with foreign accents and starched uniforms poured out rivers of Taittinger. As the guests nibbled morsels of toast, layered with cream cheese, gravadlax and slivers of black olive, I chatted with a chap from "litigation control" ("If you charge by the hour and think very slowly, you can make an awful lot of money"), and talked double-digit price growths with someone from the number-crunching department.

The air was thick with feelgood factor, and not even the prospect of an imminent Labour government ("a foregone conclusion," according to one of my hosts) seemed to dampen this most conservative of proceedings. "I must admit, Michael Portillo makes my flesh creep," said one immaculately lipsticked Knightsbridge lady. "He's got 'hit me' written all over his face."

Nobody said what the party was in aid of but a 14.5 per cent year-on- year rise in Belgravia property values is as good an excuse as any to pop the corks from several crates of champagne. Like other agents at the top end of the property industry, Savills has enjoyed a profitable first quarter, particularly regarding house sales in London and the South East. According to one of its agents there's "a renaissance in property being bought as an investment as well as a home".

Driven by stockmarket bonuses, foreign investment buyers (principally from Hong Kong and Singapore) and a shortage of the "right" properties, the capital's heated market is seen, by this faction, as the portent of a Second Coming for a nationwide upturn in house prices - regardless of the election results. (Rival agency Knight Frank recently made the dry comment, that it doesn't see the "widely predicted victory for Labour" having a significant effect on the market because "the economic policies of the Labour party do not appear to be dramatically different to those of the current Government".)

"Of course, it's nothing like the Eighties boom," said a Savills Surrey consultant in a silk bow tie. "Ten years ago, it didn't matter if a house was as ugly as sin and sat on a main road, people would buy it at any price. These days, buyers are much more fussy and still very cautious." Let's hope he's right, because signs of the crowd hysteria which underlined the 1988 boom-time peak are beginning to re-emerge.

In March, the launch of Galliard Homes' White House development - a huge, white slab of a building that used to be the Shell headquarters on London's South Bank - attracted a jostling crowd of buyers, some of whom camped on the pavements in order to be first in the long queue. "It was like the first day of a Harrods sale," said one of the agents involved in this spring investment scrum in which over 50 properties sold within four hours, and 78 units had gone by the following day (at prices from pounds 155,000 to pounds 300,000). "Things got so tense we thought it might get out of hand," he added. The White House will not be ready for occupation until the autumn.

Estate agent John D Wood claims, meanwhile, to have marketed an Oxford property at pounds 595,000 but sold it for in excess of pounds 730,000. A house in Chelsea became headline news when its sale made its owners pounds 400,000 richer just one year after they had bought it. A Nationwide Building Society report noted a 9.7 per cent average rise in house prices last year - the highest since 1989. Every house on the market now attracts roughly nine potential buyers. The tender of sealed bids is increasingly common. Gazumping is back.

A contrasting note of realism on the market comes from one-man-band agent Nicholas Davies, in Llantrisant, south Wales. "It's a bit of a sore subject," he admits. "These wild reports put out by big agents and building societies give the wrong impression. It is a better market because we are selling more properties, but I haven't seen any price rises in the last six months."

Houses in the Welsh valleys - where the demise of coal-mining has robbed whole communities of a livelihood - are among the cheapest in the UK. Davies sold a three- bedroom, no-bathroom terraced house in a run-down Rhondda Valley village last year for pounds 3,000. You can still pick up a house in the area for less than pounds 10,000. Nothing short of improved job prospects will change that.

The rental market, says Davies, has "grown out of all proportion" because people who can't sell their homes let them out instead. He might also have said that the gradual erosion of Social Security benefits, which has almost completely removed the safety net for mortgagees (it now takes about nine months before the government pays the interest on your mortgage; previously it paid up immediately), makes renting a safer option. The Citizens Advice Bureaux deal with a staggering 10,000 mortgage-arrears enquiries a month. The Council of Mortgage Lenders says that the number of repossessions is falling but, still, 18,460 homes were "taken into possession" in the second half of last year (down from a peak of 38,930 in the second half of 1991).

If you look beyond the hype, you find a two-tier market with winners at the upper end of the price scale and in the best areas, and losers almost everywhere else. Home-owners in London and the Home Counties are still more likely to be suffering from an Eighties' negative-equity hangover, because prices there were subject to greater inflation during the boom. But there is a much higher propensity for repossession and mortgage difficulties in the lower income bracket.

According to the Halifax House Price Index, in the first quarter of 1997 there was once again a widening of the traditional gap between North and South. While London prices are up 17.4 per cent year-on-year, the report showed drops in the North of up to 9 per cent. The figures, however, are academic if you consider that every town and city is made up of dozens of housing micro- climates, each with its areas of house-price boom and blighted-street bust.

On the eve of the election, it is useful to examine some of the factors which govern the winning and losing, and the roller-coaster ups and downs, of this lottery we call the housing market. Let's start with first-time buyers - an area I can discuss with authority because I bought my first home last week.

I decided to buy because my rent increased by 25 per cent just as my bedroom wall sprouted a patch of creeping black mould. Deregulation of the private rented sector in 1988 may have broadened availability, but the implementation of market-driven rents means that they are subject to frequent hikes regardless of the rate of inflation. The Joseph Rowntree Foundation's State of UK Housing report of two weeks ago also points out that one in five homes in the private rented sector is unfit for human habitation.

My house-hunting was done at the end of last year. I was gazumped once and twice beaten by higher offers. The house I found in March came on to the market on a Friday, was seen by six people on the Saturday, and was subject to two offers by Monday.

Typical of mid-Nineties first-time buyers, I leapfrogged the bottom end of the market, put down a 10 per cent deposit and went for a four-bedroom terraced house with a freehold and a garden. This meant moving to a more downmarket area but the extra space means I could take in lodgers if interest rates spiral upwards again. The sale price reflected the current national average of pounds 67,334. It's not a house that would interest Savills.

The trend for bypassing one-bedroom converted flats and studios - popular with first-time buyers in the Eighties - has made the existing owners of these small properties the most vulnerable to continuing negative equity. According to the Council for Mort-gage Lenders, they represent "a hard core of severely affected households" still caught in a trap. And there isn't much of a tradition for pieds-a-terre anywhere outside London.

Aside from the tendency to take a long-term view, perhaps the biggest property-market story of the mid-Nineties has been the desire for self- expression reflected in the growth of the self-build industry, the demand for country ruins and unmodernised town houses and, more significantly, the phenomenal rise of the urban loft. "There's a premium to pay for anything which is interesting and doesn't conform to standard box construction," said an erstwhile loft-dweller who preferred not to be named because he didn't want to be associated with the "distasteful" sum of money (pounds 150,000) made from the recent sale of the east-London loft he had bought in 1993. "It's not about making money, it's about quality of life."

The loft market is one of the few that was given a leg-up by the recession. The early-Nineties slump in commercial property values left hundreds of buildings empty. The Secretary of State for the Environment, John Gummer's housing initiative to the year 2019 helped promote the market further by giving tax incentives to developers and relaxing planning restrictions in industrial zones. The result has been the redevelopment of millions of square feet of redundant inner-city industrial space and the repopulation of areas which, until recently, died after the close of business at 6pm.

During the Nineties, loft conversion has spread from inter-war factories, printworks and warehouses with credible architectural pedigrees to plain high-rise blocks of post-war offices which once suffered from Sick Building Syndrome. Spaces have got smaller, less loft-like and more expensive. But over 100 office buildings have been converted in central London in the last four years - and this is one trend that has rapidly rippled out to other major British cities.

While high-rise office blocks are providing huge profits for developers, the sale of flats in Sixties council blocks - which were, after all, designed for people to live in - have created some of the most painful property- buying experiences of recent years.

"More than two million tenants have bought since 1979, 1.7 million of them thanks to our Right-to-Buy policy," said housing minister David Curry when asked to outline Tory housing policies for one newspaper last month.

In fact, Right-to-Buy was first implemented by Labour but, whoever's responsible, many of the tenants who have joined Britain's home-owning democracy in the last 10 years have, as one council leaseholder put it, been "royally shafted" - principally by the colossal service charges which have made thousands of concrete-built council homes virtually worthless and certainly unmortgageable. The fledgling National Federation of Council Leaseholders which campaigns against the iniquity of huge service charges, intends to put up a fight, but it is hard to envisage a spring when any of its members will be cracking open bottles of champagne because the market's tide has turned in their favour.

Regardless of the general election results, wannabe movers and buyers should proceed with caution. However, as one agent pointed out: "If you like the house you buy and you're prepared to stay there for a long time, you can't lose." !

THE LOSERS

RIGHT-TO-BUY: PEGGY GRANTHAM

PEGGY GRANTHAM moved into her Mellish Court council flat in Milton Keynes 30 years ago. It's a 17-storey, panel-built, high-rise development and when it was opened in 1965 by Robert Mellish MP, it was billed as 136 luxury apartments for professional people.

Over the years, the concrete building deteriorated and when Peggy moved from the 17th to the 16th floor in 1988, the flat she took over was in an appalling state. "The floorboards were rotten, the bathroom and kitchen were disgusting." Her council landlords, however, declared the condition of the flat as "adequate" and declined to take responsibility for improvements. Peggy decided to purchase the property under the Government's Right-to-Buy scheme and do it up herself. As a long-term tenant, she was entitled to a discount of 70 per cent. Using her savings, she bought the two-bedroom flat in 1989 (then valued at pounds 38,000) for pounds 11,500.

Peggy, who worked in the text-processing department of the Open University, spent pounds 15,000 on improvements and delayed retiring for five years to meet the costs. She is now living on a pension, but despite owning her flat outright, her overheads have doubled. The building started to crumble: cracks appeared in the infrastructure, water penetrated, window-frames rotted. Leaseholders were expected to contribute to the repair costs. And last year, Peggy's annual service charges, including a new "corporate charge" collected by the council, amounted to pounds 3,200. Mellish Court's renting tenants pay less than half that amount in rent.

"Earlier buyers were informed about structural faults in the building," says Peggy. "But when I bought a few years later, those declarations had disappeared from the leases."

Of the 16 leaseholders who bought flats at Mellish Court in the Eighties, five have been repossessed. Those who tried to sell found their properties were no longer mortgageable and were forced to put them up for auction. One was sold for pounds 2,500. Council leaseholders of three-years' standing, says Peggy, are entitled to take part in an exchange-sale scheme, but the council will only buy the flats back at the original discounted price - and only if the leaseholder agrees to buy another property from existing housing stock, at a discount of 40 per cent. "We are sitting ducks," says Peggy.

Peggy is one of thousands of leaseholders on council estates all over Britain - many of them pensioners - whose properties have been blighted by structural defects, poor maintenance and crippling service charges. She is one of the luckier ones: some leaseholders in the London boroughs of Wandsworth and Camden have received repairs bills of pounds 30,000 to pounds 100,000. Many have had no choice but to walk away from their worthless homes. Repossessed or auctioned council flats are often, ironically, bought by private landlords and let out to social-security claimants at higher rents than the council's. So, it's taxpayers - not only dispossessed leaseholders - who pay the price.

The leaseholders at Mellish Court are planning legal action against the council over their service charges. Last year, they arranged a meeting with councillors but it was cancelled when officials who came to make a pre-meeting inspection got trapped in a faulty lift for nearly an hour. The meeting was never re-convened.

NEGATIVE EQUITY: LORNA PETTIPHER

MAGAZINE EDITOR Lorna Pettipher bought her one-bedroom flat in a converted Victorian house in Gypsy Hill, south-east London, just before erstwhile Tory chancellor Nigel Lawson scrapped joint mortgage relief in July 1988. It was the point at which the property boom reached its most vertiginous peak. "Prices were galloping out of control," says Lorna. "I truly believed that if I didn't buy then, I'd never be able to. I didn't see it as a way of making a quick buck. I wanted security and I thought it was the responsible thing to do. I realise now that I was very naive."

She bought her flat for pounds 65,000 with a 95 per cent low-start endowment mortgage. Soon after she moved in interest rates soared. At one point, Lorna's mortgage repayments hit pounds 750 a month. Last year, she put the property on the market for pounds 35,000. One buyer offered pounds 30,000. Lorna stayed put. "I often wonder if the flat will be worth what I paid for it within my own lifetime," she says.

According to recent research the number of households affected by negative equity fell last year by 129,000. But there are still nearly 500,000 caught in this financial trap. In Lorna's case, the situation is exacerbated by unusually high service charges, levied by the freeholder (whose antics, incidentally, were investigated by a recent Cook Report). Like thousands of leaseholders, she has discovered that home-ownership does not free you from landlords. (In a bid to help, 1996 legislation introduced a Tribunal Valuation Service to mediate between freeholders and leaseholders, but it hasn't been implemented yet.)

Lorna's service charges, which almost doubled this year, run to pounds 800 per annum. "The house is well maintained," she says. "But it's not as if we've got a swimming pool or valet parking." These high charges have helped devalue the property but, says Lorna, the problems in selling it have as much to do with a fall in demand for one-bedroom flats. "People can buy a two- or three-bedroom place in the same area for less money than I paid for this one."

"I've often fantasised about walking out and just leaving the keys, but that's not the real world. The only way I can put this nightmare behind me is if I rent out the flat and become a landlord myself - or hope that it spontaneously combusts." Does she like the flat? "I don't like the area and living here is not convenient. But it's a case of learning to like it or going mad."

THE WINNERS

LOFT-DWELLERS: JOHN AND JANE PINNINGTON

IN 1995, John and Jane Pinnington moved from a rented terraced house in the Liverpool suburbs to a loft apartment on the top floor of a converted, once derelict, chemical laboratory in Concert Square - the heart of the city's "creative quarter". The building is one of a number of schemes undertaken by innovative north-west property developer Urban Splash, which has "regenerated" over 500,000sq ft of redundant industrial inner-city space since 1990. The company claims that the projects have "acted as a catalyst in changing people's perception of urban localities".

Typical of the New York-style loft genre, its properties feature double- height space, sand-blasted brickwork, exposed structural ironmongery and suspended bed decks. Unlike most of London's early lofts - sold as "shell- and-core" units - Concert Square apartments came with fitted kitchens and bathrooms and were aimed at first-time buyers. As in London, Northern lofts have been selling like hot cakes.

The thirtysomething Pinningtons (he designs Internet websites; she's a criminal lawyer) bought their 900sq ft of Liverpool loft for pounds 52,000. They were among the first buyers to invest in the Concert Square scheme. The attraction, says John, was the space, novelty ("we wanted something different and, at the time, there was nothing else like it in Liverpool") and the location - "We can both walk to work. The city's main shopping and nightlife are 100 yards away and we've got a great view of the Liver Birds and the Anglican cathedral." The downside? "There's nowhere to park. And being in the midst of a rapidly developing 24-hour city means there are a lot of drunks rambling all over the sidewalks."

In less than two years the Pinningtons' loft has increased in value by at least pounds 10,000 - despite an overall dip in local house prices. In central Manchester, an equivalent-sized flat in Urban Splash's latest Smithfield Buildings development (the former Affleck & Brown department store) is selling at pounds 75,000 to pounds 100,000. Although the project is not scheduled for completion until the autumn, pounds 2m worth of off-plan sales has already been achieved there.

"Living in this kind of environment is not for everyone," says John. "Our flat is roughly the same size as a three-bedroom house but it is still basically one room. If we had a baby we could probably live here for another year, but lofts are not ideal for small children."

DOWNSHIFTERS: FRANK AND ROSALIE O'NIONS

FRANK AND Rosalie O'Nions describe their canal-boat home as a "floating backpack". The vessel has permanent moorings at Crick, Northamptonshire, but they regularly take her on voyages around Britain's inland waterways. The journey to Little Venice in London takes about a week. The couple are a classic example of contemporary "downshifters" - people who have deliberately taken a cut in income to improve their quality of life. Featured in the recently published Getting a Life: The Down-shifter's Guide by Polly Ghazi and Judy Jones, the O'Nions are part of a growing trend.

Until 1994, they lived in an "idyllic" country cottage in Buckstead, Sussex. Frank, 62, ran his own company supplying refrigeration units to supermarkets. Rosalie, 55, designed and manufactured hand-made clothing for high- fashion retailers such as Gucci and Liberty. "We were fed up working increasingly long hours for ever-decreasing profits," says Frank. Their four children had all left home so they decided to give up their business interests, free themselves of most of their possessions and become "a couple of gypsy wanderers".

Aside from a pension fund, the couple's only capital was tied up in their property, so they sold it - within two weeks - for pounds 120,000, bought a small, modern house in Rugby, let it out to tenants to secure a regular income, and invested pounds 29,500 in a 60ft narrow boat. When they first sold the cottage they hadn't had a clue where they were going to settle. "We were walking along the towpath of the Regent's Canal in London when a boat slid past us at about four miles an hour and we thought, 'That looks like a peaceful way to live'."

Frank now earns a living making puppet theatres; Rosalie produces hand- knitted clothing which she sells at craft fairs. The two have written a book about knitwear design and are currently writing another. "I miss having a proper bathroom and the space to entertain family and friends," says Rosalie. "But it's worth making compromises for a freer, simpler life."

SELF-BUILDERS: ROBERT AND TERESA MAXWELL

IN 1980, Robert Maxwell and his wife Teresa sold their home in Dalbeattie, south-west Scotland for pounds 47,700 and invested the proceeds in an acre of land 300 yards away where they built themselves a bungalow.

Robert, a "components person" in a central-heating radiator factory, caught the self-build bug at an exhibition at Alexandra Palace, London. "Self-build" refers to anyone who manages the construction of their home, regardless of how much physical effort they contribute to the project. Over 12,000 people did it last year and the trend for self-build has grown in the last two years by around 20 per cent.

"The advantage for us was getting the house we wanted instead of choosing one from rows of identical properties on a large development," says Robert. "It's about having vision." It's about saving money, too: self-builders can claim back the VAT on all materials and labour and, on average, a self-built house is worth 30 per cent more than it cost to build. The downside for Robert was that planning permission was subject to widening a road and installing mains sewerage at his own expense (pounds 18,500).

The Maxwells' bungalow cost pounds 54,000 (plus land costs) and was built by using a timber-framed kit and hiring contractors to do the jobs Robert couldn't handle himself. Finished in 1990, it took six months to complete.

The family soon out-grew the bungalow (his three sons were getting larger), so it was sold for pounds 82,000. A second was built on the remaining plot of land. The new "one-and-a-half-storey bungalow" cost pounds 58,000.94p, plus a percentage of the original land price. It was valued on completion in 1994 at pounds 105,000.

"If I was to add up the amount of hours I put in, the profit margin is not as good as it sounds," says Robert. "But profit wasn't my motivation. I'm an ordinary man on a fairly low income but I took a huge risk that paid off. Anyone with a bit of courage and initiative can do the same. I think we will build again, but it's a question of choosing the right moment."

HOT-SPOT INVESTORS: CHARLES AND CLAIRE PHILLPOT

CHARLES PHILLPOT, 42, is managing director of the Property Marketing Company (PMC), an advertising agency specialising in the "sale and disposal" of commercial and residential property. Its recent campaign for Galliard Homes' White House development on London's South Bank resulted in the sale of 78 out of 81 apartments in 24 hours (see main text). In fact, PMC has been involved in the sale of property worth over pounds 100m in the first quarter of this year. But Charles is a winner in his own right, too.

Four years ago, during the depth of the slump, the Phillpots swapped their four-storey townhouse in Chelsea for a pounds 250,000 four- bedroom Fifties mock-Tudor house in a Buckinghamshire area of "rur-urbia" (where green field meets suburbia). If he were to market the house today, Charles reckons that he would probably get close to pounds 400,000. He wouldn't sell it, however, for pounds 500,000. "There's a wonderful sense of community here and you can't put a market value on that," he says. "I don't think we would be able to buy anything else as good as this at any price."

The location, he explains, is a property-market "hot spot". Two miles from both the M4 and the M40, 26 miles from London, 20 minutes from Heathrow, a short hop from the mainline railway station at Slough. "I can leave home at 6.30 in the morning and be in the City by 7.10," he says. He can also wheel his trolley to the local golf club and refresh his City-polluted lungs with weekend walks in the nearby Burnham Beeches, one of England's largest remaining forests. "The air here is lovely."

His wife, Claire, a public-relations consultant, works from home in a converted snooker room in the "medium-sized" garden. His four-year-old son attends nursery; his six-year-old daughter goes to a local private school. The area, he points out, has some of the best state grammar schools in the country. "Nobody can say if we'll have jobs in 10 years' time, so having a good choice of schools in both sectors was a critical factor in choosing this house."