You’d be wrong. The second home market is in better health than it has been for a while. Karen Clark, personal tax partner at accountants Baker Tilly, says that there were 241,000 households with UK second homes in 2006-7, according to council tax records. That number had grown 40 per cent over the last decade. That’s excluding second homes abroad, which have more than doubled in a decade and stood at 248,000 in 2006-7. Savills, which tracks second homes through its branch network, says growth continued in 2007-8, at 2.6 per cent – slower than before, but still increasing the total.

However, Lucian Cook at Savills says the market for second homes has changed. Traditional hotspots have seen low, no or negative growth in the number of second homes, while less traditional areas are becoming more popular. For instance, the number of second homes in the South West and East Anglia grew only 0.7 per cent, way below the average 2.6 per cent figure. Devon and Cornwall seem to have done particularly badly.

In some areas, such as Salcombe and Rock, second homes represent over a third of the market – and that leaves them looking vulnerable. South Hams and North Norfolk both have high rates of second home ownership, at over 9 per cent – and saw declines in the number of second homes of 5.99 and 3.4 per cent respectively. Not all of the decline in second home ownership is due to owners selling up and moving back into the city, though. An increasing number of second homeowners appear to be selling up in town and making the second home their new main residence.

Other, less traditional areas for second homes are becoming more popular. Scarborough and Berwick upon Tweed, as well as Chichester, are seeing an increase in the number of second homes. Savills interrogated local offices on the prices of those properties which agents knew had been sold as second homes. The laws of supply and demand appear to work well in this case – prices have fallen fastest in some of the ‘losing’ hotspots. Prices in Devon fell by 24 per cent, and in Cornwall by 21 per cent.

Lucian Cook says, “I’m not surprised at the price declines in some traditional markets. It relates to the percentage of second home ownership and the extent to which the local market depends on it. If you turn the tap off in terms of buyers, that’s going to have a severe impact.” Areas that were mainly driven by City bonuses, such as around Exeter have suffered badly.

On the other hand, areas which are commutable from London appear not to have seen such bad declines in price. Mark Oliver, head of Savills’ Ipswich office, believes the Suffolk coast’s proximity to London has helped underpin prices – both commuters and weekenders are interested in properties in the area. East Anglia has outperformed the South West in terms of prices and has, perhaps, a more thriving local economy, keeping up demand for main residences.

The most interesting changes, though, are within individual markets, which appear to have become increasingly polarised between prime and secondary property. Savills research shows the price of prime second homes falling by only 11.85 per cent against the bottom quartile falling by over 25 per cent.

Lucian Cook says that’s the case for all property markets – the best properties are outperforming those in less attractive locations or less than prime condition - but, he says, “that’s exacerbated when it comes to second homes.” Buyers of second homes are very selective, looking for a ‘dream home’ - because ultimately it is a discretionary purchase, so if it’s not perfect, they can walk away. “Meanwhile, the compromise home is the first one, which seems odd.”

Cook adds, “I’m not at all surprised the figures are showing us this right now, because if a market’s going to become polarised, it will do it in a downturn, because you have such a thin pool of buyers.”

Tim Hayward, partner at Jackson-Stops and Staff, says he has noticed this polarisation in the North Norfolk market. “Highly individual properties on the coast, the sort you have to buy when you see them as they don’t come up that often, will still fetch a premium. But other properties across the board have fallen 10-30 per cent.” The least affected areas are those on the coast, such as Brancaster and the Burnhams; inland, pricing’s been weaker.

Looking across the country, the level of transactions has been very low for a while, but the markets seem to have picked up in March and April this year. William Morrison, at Knight Frank, Exeter, says the market has turned decidedly for the better in the last four to six weeks, though “having said that,” he admits, “it couldn’t have got much worse.”

Tim Winney, Winkworth’s franchisee in Highcliffe, Dorset, believes low interest rates on savings have made individuals look again at property as an investment. “A lot of it is to do with the fact that people now see property as one of the safe havens for their money – a vehicle to return a reasonable yield with the potential for long term capital growth,” he says. He also believes that buyers who were intending to retire or migrate to the area are shifting their timetables, buying a second home now to take advantage of low prices and low interest rates before moving permanently in several years’ time.

He’s having a busy year, which he puts down partly to the way developments such as the new Gary Rhodes restaurant in Christchurch, and the £8m makeover of the Christchurch Harbour Hotel, have put the area on the map. Second homes in the area are selling well right now – he had a £1.6m house at Friars Cliff which was only on the market six weeks, before being acquired as a second home. Prices, he says, have dipped less than the market at large – by only 5-10 per cent – due to the attractions of the area.

Elsewhere, business has not been so good. William Morrison says that while Salcombe has done better than other areas, in the South-West as a whole, “we have seen a drop of 20-30 per cent on average from the top of the market.” So, who is buying? Though there are no statistics to prove it, the second homes market appears to be a market with a high percentage of cash buyers or purchasers with significant proportions of equity. Tim Hayward says, “It’s very largely a cash market, anywhere from £200,000 up to a million – there are people with that sort of money.” He believes many purchasers are taking money out of interest bearing bank accounts, to increase their investment return. For instance, he is currently selling one property that the purchasers will put into their children’s name, obviously intended as an investment.

The mix of buyers hasn’t changed. Overseas buyers may have made an impact on the Central London market, and on large country properties, but they don’t seem to be affecting the second home market much. William Morrison says “The mix of buyers we see hasn’t changed; the demand is here across the board.”

And who is selling? This is the problem. There appear to be very few forced sellers, and even where second homes have been bought with relatively high mortgages, low interest rates have helped weather the storm, according to Tim Winney. That leaves the second homes market desperately short of stock. Lucian Cook says, “The whole lack of stock is a real issue, a big issue across the market.” Stock levels have eroded steadily since mid 2008; every office I spoke to admitted that it was a problem sourcing properties, though a national network can help with deal flow.

William Morrison says, “There’s a bit of frustration among buyers now owing to lack of stock. The sellers are the same as they’ve always been; there hasn’t been a massive glut of forced sellers. There have been a few.” He has 30 per cent less stock on the books than a couple of years ago – which could become a real problem if the market takes off.

On the other hand, it’s possible some potential sellers are not happy with the prices they could achieve for their homes, and are waiting to see if the market will turn. In any sustained upturn, they may decide it’s time to put the house on the market – so that supply will be freed up. One cloud on the horizon is the change made in the budget to the taxation of furnished holiday lettings. Karen Clark, personal tax partner at Baker Tilly, explains the changes. “With buy-to-let, if you made a loss, all you could do was carry that loss forward against profits on rental income. You couldn’t set it against your other income. But with furnished holiday lettings, you could.”

There were various conditions: the property had to be in the UK, available for letting for over 140 days a year and actually let for 70, with a maximum of 31 days per person. But once these were met, the tax break could be claimed; so could Capital Gains Tax rollover relief, which only applies to business assets such as holiday lets and not to residential properties. However, she says, “Investing in holiday property is still worthwhile. You’ll still get relief if you make a loss one year and a profit the next, though if you never cover your costs it won’t be much help.” Owners of more than one property can also set losses from one against profits from others, but not against other businesses or income.

Of course income tax is not the only tax property owners pay. Karen Clark points out that now the UK has reduced the rate of Capital Gains Tax to 18 per cent, the regime is more favourable than that in Spain (which charges 40 per cent) or France (unless the property is held for 10 years or more). She believes the impact on the second homes market will be limited. “I spoke to a couple of my clients who have furnished holiday lets, and they said that’s not the main reason they bought the property. In comparison with some of the other changes made in the Budget, this is not a huge one; it’s a storm in a teacup.”

In fact Tim Winney points out that if you look at the underlying business, rather than the tax breaks, the returns on holiday lettings have improved. More people are holidaying in the UK, as exchange rates in Europe are unfavourable. “People are now earning in a week what they used to get in a month,” he says; a two bedroom bungalow worth £250,000 can achieve a yield of eight or nine per cent.

One might even speculate that the high profile cases of British buyers seeing their Spanish flats bulldozed, or their Bulgarian ski chalets plunging in value, may make some of those quarter of a million owners of second homes abroad wonder if they would be better off with a second property in the UK. If they’re repatriating funds from the Eurozone, they’ll do well on the exchange rate, too.

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