Property Crumble

This chart shows why UK house prices will fall in 2011 (click to enlarge).

We’ve seen two significant periods in UK housing demand since 2007. Firstly , the 25% fall in UK property prices in 2008 was driven by a collapse in demand which began in late 2007.

Secondly, the 2009 recovery (of around 8 to 10%) was driven by lack of supply.

We are now clearly into a third and relatively new phase – following the abolishing of HIPS plus increased tax on capital gains, which has pushed up supply of property sharply (vendor instructions) just as tax rises and weaker job prospects cut back demand.

Almost certainly, 2011will be a year of falling property prices and nearly every property price forecast is predicting this.

2010 property prices will end down too.

The key question is what will happen to prices in 2012? Well, demand, not supply is now the key measure which will either undermine or support property prices. And demand will be strongly influenced by mortgage rates, unemployment prospects and net take home pay.

Needless to say, it is unlikely that any of these three factors will be significantly stronger in 2012 than 2010.

Only London and North West surveyors remained confident over the past 3 months according to the July 2010 RICS survey.

Last month survey showed us that South East England property stocks capitulated and this month the South East surveyors turned negative, for the first time, in their forecast for house prices for the rest of 2010.

All UK regions, including London, are now expecting property prices to fall in the next 3 months.

Sentiment is worst in West and East Midland and better in London, North and North West – but all regions, on balance, believe prices will fall during the rest of 2010.

Given that surveyors wouldn’t normally choose to talk the market down, this is a significant result and shows property price prospects have dimmed sharply.

Secondly, one of the more optimistic regions, the North West, has been reporting higher levels of expected sales than the number of sales actually achieved. Sooner or later reality has to catch up with hope and hence, when this occurs we can expect a further dimming of prospects for 2010 and 2011.

In the meantime, things are cooking up for a sharper fall in property prices.

Firstly, new buyer enquiries continue to fall moderately across the UK. The number of property sales is falling too, now at around 15 sales per surveyor, the lowest point in 10 years except during the very sharp fall in 2009. However other RICS data suggests we might reach the low levels of of property sales in 2009 again, sometime in 2011.

In the meantime, the number of new vendor instructions has rocketed. The July 2010 rate of increase has passed all previous 10 years peaks except the hike in late 2007. It seems owners and investors are rushing to the market to off load property as quickly as they can.

In the meantime, the number of unsold properties is now at 69 up from 66 in June and 62 in May.

The Autumn will be a torrid time for property sellers but is still too early for investors to consider entering the market.

The only good news is that interest rates are likely to remain low until 2011, but during 2011 rates will have to rise to around 2.5% and an increase of 2% and this will probably add around 50% to an average variable monthly mortgage bill.

Hence, it is clear that property prices will fall in the remainder of 2010 and all house price forecasts will predict a continuing slide in 2011.

As regular readers of this property price blog will know, we closely follow the supply and demand in UK property to see where property and house prices might head in 2010 and what we might forecast for 2011 property prices.

So the latest news that the South East of England’s property market has capitulated is important news for 2011 forecasts.

Essentially, for most of 2010 the UK has run two property markets London and the South East plus the rest of the UK.

London and the South East have had relatively healthy property markets and London surveyors report a stock of around 30 against a national average of 67 and levels above 90 in the North West, Yorkshire – Humberside and West Midlands regions (Wales has over 140).

The South East – until June – had been performing very closely to the London model – very low stock, steady sales and steady price rises since 2009, but in June we see the first signs of capitulation in the latest data from RICS (published mid July 2010).

In this new data we see the number of buyer enquires falling, stock levels rising rapidly and most concerning of all, the number of completed sales collapsing towards a low not reached since march 2009 when property prices fell 25%.

London too is showing a slow down in sales and enquiries but its stock levels are so low, at 30, that things need to get  a lot worse before we’ll see significant price falls in the capital.

However, now that the South East’s performance is mirroring that of the rest of the country we can expect to see the countrywide averages turn negative and as that does, so will people’s expections.

Surveyors are already reporting that the Euro crisis, followed by the emergency budget followed by the World Cup have already dented confidence and it seems that those responses are now showing up in the early data.

At the same time, economic forecasters are now polishing off their worst case scenario property price forcasts for 2011 with predictions of a 30% fall in prices becoming the norm (latest from National Institute of Economic and Social Research).

Will this happen? Well, not in London for sure.

The most likely national average property price fall will be around 10% to 15% by April 2011. However, that will mask two things.

Firstly, London will fall perhaps 5% to 10% and other parts of the UK will fall more dramatically – perhaps 15 to 25% and these regions, in order of risk, would be

1. Wales
2. Yorkshire & Humberside
3. West Midlands
4. North West 
5. East Anglia

Secondly, the only properties currently selling are prime properties – ie. those that have a better aspect or larger garden or better condition than the average. The rest of the housing stock of average or ordinary houses that normally sell during a boom period aren’t shifting at all.

So, the more modest falls in headline prices mask that fact that only superior properties are selling and the massive regional variations.

Now, equally, the falls might be delayed or sped up depending on when the first rise in interest rates is applied by the Bank of England,  but nevertheless, in nearly all cases, with perhaps the exception of those parts of the London market which are driven by global economic performance, the value of a property at the end of 2011 will be at or below the value of the same property in 2004.

Okay, UK property prices perked up in the UK after a 34% increase in supply (according to countrywide) and the removal of the HIPS restriction on selling. (Sellers were previously required to spend around £500 producing a legal document before they could put their house on the market).

Did buyer enquiries jump? No.

Did mortgage rates go up or down? Both!

Yes, seriously, the 5 year fixed rates reached 4.5% (down a bit from around 5%) for the best deals whilst some UK lenders added 0.2% to their standard variable rates to cover their increased costs of borrowing in the rising interbank lending markets.

Nationwide and Halifax independently reported UK property prices going up and down.

Mean while, back in the US, latest figures show a 10% fall in new house building in May alone – that is regarded as a big fall, and employment figures show this is a jobless recovery. And, without salaries, how is a lender to judge the security of income against which it can lend?

So, it is going back to liars mortgages (sorry, self-certification) or nothing.

Okay then, what does all this do to house price forecasts?

Well, the UK is waiting on a special budget on 22nd of June to discover what increased rates of tax property investors will have to pay on their capital gains profits, when they sell.

This could lead to a rush to the exits.

Either way, the change in tax status puts a further question mark over property as an alternative pension fund – albeit, BPs loses will remind many of the benefits of owning bricks and mortar.

Still, the tea leaves show us that there has been an massive increase in the desire to sell – interest rates are expected to rise at the end of the year – and no, mortgage lending volumes haven’t kept pace.

That can only mean one thing – a big increase in supply with modest demand unable to soak it up.

Therefore, our UK property prices forecast for the rest of 2010 is that prices will head steadily down.

Anecdotal evidence is that the rate and quantity of asking price reductions on UK property are beginning to feed through into the market. Once these reduced asking prices reach the transaction stage – in about 3 to 6 months, we should have seen some significant declines.

So, how much will UK property fall? Well, current prices are at or around the 2006 to 2007 level whereas the UK economy is back to where it was in 2004. There is no reason to believe there is any fundamental support for UK property prices above their 2004 value.

How long will it take to get there? Hopefully a full year or so – so a soft deflation. But get there it must. And as UK economic growth is going to be slower than previously thought we can no longer expect to rapidly grow ourselves out of the problem.

The UK coalition government has made an immediate impact on the UK property market with measures that will quickly weaken UK property prices.

HIPS – Home Information Packs have been suspended with immediate effect – and will, in the words of one estate agent, lead to an increase in properties put up for sale on a speculative basis.

Equally, the threat of capital gains taxes on profits of up to 40 or even 50% has led long term investors to seek a quick sale.

Don’t forget the central London market has been is largely driven by foreign money for the past few years – Russia or Middle East Oil Money plus Euro investors – and now, those same investors need to sell quickly as they too will face 40 to 50% tax on any UK property gains.

Of course, those same non-UK investors will seek to place their investments in alternative, low tax,  locations. And, to this, can be added the UK based investors also heading for the exit before the new rules take effect.

Agents are already reporting a sharp increase in instructions and we can expect the supply of property to rapidly outstrip demand – even in property’s traditionally best selling season – the spring.

And, at some point, the over supply on the market could reach a tipping point which sends UK property prices downwards sharply.

All eyes on the RICS supply figures to be released shortly. We could be in for a far sharper decline in UK property prices than seemed possible only a week ago.

Are Property Prices in for a Battering?

The UK election has past and now we can get on with the new age of austerity.

All data now points to UK mortgage rates rising later in 2010 and moving steadily upwards in 2011.

This is the picture following an almost perfect storm of bad – but predictable – data:

• UK Govt 10 bonds (gilts) jump from 3.662% per year interest rate to 3.99% on May 7th.
• Against German Govt 10 year bonds (Bund) this is a premium of 1.248% per year (the highest for 12 years).
• FTSE fell 2.6% on Friday to complete 8.8% fall on week (although it recovered 4% on Monday as Euroland agreed a deal for Sovereign debt).
• UK factory prices rose 5.7% in April 2010 (an 18 month high)
• UK retail price inflation was 3.4% in March 2010 (well above the 2% target) and the hope of inflation subsiding back to 2% by the end of 2010 is fading fast.

The Times reported on Saturday 8th May, that service companies margin’s are being squeezed as they absorb rising costs and that they will start to rise prices soon.

Halifax reported that UK property prices fell 0.1% in April due to an increase in supply (homes for sale) compared to buyers. This is despite extra UK Govt intervention in the form of a tax incentive for first time buyers (no stamp duty on first purchase up to £225k).

R3 – the association of business recovery specialists – reported that while only 35,000 people went bankrupt or sought voluntary credit arrangements in the first quarter (Jan to Mar) of 2010,. However, there are a further half a million people using debt management plans and another 961,000 people who are struggling with debt and have not yet sought help.

These people – many with bad debts and lower income – have survived the downturn thanks only to historically low interest rates.

The evidence is that this extra-low interest rate environment will not continue and there will be a steady rise in personal bankruptcy – which will peak in 2011 as rates rise over the next 12 months.

Once the spring is past, the net supply of property will increase until a tipping point is reached and property prices head downwards again.

This downward momentum will be maintained by rising interest rates which will force owners to sell empty properties – for lower prices – rather than hang on to them.

Equally, a substantial increase in bankruptcy will ensure that more properties are repossessed and returned to the market, which will only make the supply of property worse.

Of course, it could be worse and public sector employees could receive a 5% pay cut as in Spain. In the UK perhaps we’ll escape with just a pay freeze for the next two or three years.

Where can this end? Surely, only one thing – a steady and on-going decline in UK property prices beginning around the late summer of 2010.

US Property prices, according to the Case-Shiller index, recorded their first rise in almost 4 years.

The rise, of 0.6%, was below the forecast of 0.9% and sits against a 3.2% GDP increase in the first quarter of 2010.

Equally, the spring is a typical time for price rises.

For these various reasons, foreacasters remain cautious about any further increases explaining that there is a still a significant phase of re-adjustment to work through before steady price rises begin. Not least the fact that various mid sized US cities are staring at bankruptcy.

US consumer inflation – not adjusted for seasons – is running at 2.3%.

UK Property Stocks Mar 2010 source RICS, Property Crumble

UK Property stocks are on the rise as this months graph shows.

Currently, the average stock per surveyor is around 67 and you can see that the last trigger point for a property price crash was in late 2008 when property stocks reached 90 per surveyor.

Therefore, we have a long way to go until a sharp price in UK property prices is triggered – but we should expect further increases in stocks over the next 12 months as the number of new instructions is increasing faster than the number of new buyer enquiries.

The risks between a property crumble, property price stumble or all out property price crash are fairly evenly balanced, with the property crumble the most likely scenario, but all three being realistic possibilities.

Either way, the forecasting commentary from house price economists is turning more and more negative.

Pretty much as predicted, the supply of property in the UK market has continued to increase according the the latest RICS survey, and no, the expected buyers have not materialised.

On an anecdotal level, I counted 21 For Sale boards – many of them new – on my way into work this morning and only 1 Sold sign (and that was sold before Christmas anyway).

Latest mortgage figures show that there has been no significant increase in lending – so, not surprisingly, buyers are not able to bid up prices and the property chains are collapsing.

We’ll provide more analysis shortly on the latest supply figures, but April is traditionally the best month for UK property sales and hence a weak April bodes for further price falls during 2010.

UK Property Prices - Slowly Sliding?

Nationwide’s index reported a modest increase in UK property prices in the February to March 2010 period.

At the same time, the US Schiller index reported weak US property prices amid growing consumer confidence.

The UK’s chancellor also announce an attempt to reflate the UK property bubble by suspending stamp duty for first time buyers on properties up to £250,000.

So what is happening?

Firstly, property prices are not collapsing or falling significantly (as per the index) however, the  number of mortgage approvals is still very low and there are clear suggestions that only the ‘best in the road’ properties are selling with all other less attractive options unable to obtain a buyer.

This flight to quality means that the indices will in effect compare the prices of the weaker properties (which sold in a strong market) with the stronger properties which are still selling in a weak market (unlike their weaker cousins).

What do we mean by weak property?

Well, simply properties that need work doing to them – or lack basics such as double glazing or where the wiring is a bit old, or it may simply by that the stronger properties are being sold with display furniture from the developer and so forth.

All of these subtleties are lost by the indices and explain why the indices don’t drop as much as it feels they ought to in a weak market. Or, why the indices don’t manage to reflect the real experience of property buyers and sellers.

Secondly, the US is reporting, at the end of march, more positive news on consumer confidence with an expecting increase in employment – however, the US property price forecasts remain on the slightly negative side.

This suggests that we could see growing consumer confidence coupled with stagnant or weak house prices. And, if the much anticipated inflationary pressures get stoked in either the UK or US, then house prices will fall in real terms.