Property Crumble

Charles Bean, deputy governor of the Bank of England, released a statement this week which stated that “the recovery in confidence and rise in asset prices since the start of its quantitative easing had been significant”.

He appears, in the language of central bankers, to be saying that quantitative easing (or printing money) has lifted the price of residential property, commercial and other assets.

Interesting.

He is saying, therefore, that the rise in those assets has been artificially stimulated and that at some point that stimulation will be withdrawn?

One can only presume a gradual withdraw and therefore a gradual reduction in those asset prices. A slow crumble, then?

CEBR – a well respected economic think tank – have predicted that UK interest rates could say as low as 2% for 5 years.

This contrasts with the money market´s view (as discussed in the post on 5 year fixed rates below) that  interest base rates will rise to around 4% in the next 18 to 24 months.

However, this is not good news for property owners – as it would be accompanied by a ´major re-rating in share and property assets´.  In other words, for interest rates to stay low, there would need to be a major decline in property prices. Would 30% decline be major? May be.

So, perversely, UK property investors must be hoping for higher interest rates as this would signal that the declines in property prices would be less.

Either way, UK property is a weak market and offers that allow you to sell on reasonable terms should be taken.

Fitch - the ratings agency – is today forecasting a further 20% fall in UK property prices.

Their view is that property needs to drop 30% from its 2007 peak. To date, the decline amounts to only 13% and therefore a further fall from October 2009’s position will follow.

The likes of these reports have been badly wrong before, but this time, the analysis is correct. The difference is unemployment. Property prices have never fallen in a market where employment is growing. Now that the axe will be taken to public sector jobs and the private sector is hardly growing, more unemployment and a greater tolerance for repossessions will drive down property prices… slowly.

Review of 5 year fix deals conducted on 7th Oct 09

This is a selection of the best deals:

Halifax – only for existing borrowers and to 75% loan to value  (if a primary home – holiday homes get 55%)- and stepped increases. Assumes base rates to rise 1% Sept 10 and a further 0.5% in Spring.

Woolwich – for first time buyers and new customers, 5.69% for the length of the loan up to 70% (holiday homes only 50%).

So, holiday homes are toast – they must now be discounted by 20% against an equivalent property in a centre of employment.

Existing borrowers get favourable deals – first time buyers get much worse – this will, over time,  reduce the number of property owners and therefore we can assume that current supply is adequate for the reducing demand.

Base rates will be around 4% within 18 to 24 months. Assuming the spread between the base rate and the mortgage rate of about 150 bps (basis points). Normally, the spread is around 100, but we will assume this will widen as the level of competition in the mortgage market will have reduced sharply.

Property prices are, therefore, going to crumble and there is a short selling window now available.

Okay, it is beginning – the beginning of the end of the bankers honeymoon.

Since Lehman, Governments have bent over backwards to keep banks in business, but now the rules for the recovery are being laid down – banks will need to hold more cash (ie your and my deposits or government bonds) and depend less on each other for interbank lending.

The UK rules will be brought in sometime next year and probably followed by other G20 nations – allowing for an anemic recovery to proceed it – but this will slowly turn the credit tap off.

It will raise the interest you and I earn on deposit and raise the cost of 3 to 5 year fixed mortgages. This will draw savers money into bank deposits and away from stock markets and property whilst raising the cost of property at the same time (without actually raising base rates).

This change is overdue, but will have the same effect, slowly subsiding property prices. Better to sell your property, bank the money on 6 month of 60 day notice deposits so you can take advantage of the rising deposit rates to come.

The pay freeze announced by the current Labour Government will reduce after tax disposable income for over half the working force of the UK. This is because such a large part of the UK workforce is now employed by the Government or a Government organisation.

And, ultimately, property and mortgages are always paid out of post tax disposable income – for which this latest action will be to slowly reduce – and propety prices will therefore have to follow, eventually.

As there is no wage crash, so there will be no accompaning property price crash, just a slow and soft deflation.

Property prices won’t crash but they won’t boom either. Instead they will slowly crumble but with occaisional sunny spells.

The ex Property Secrets team, lay out their forecast for what will happen to property in the developed western markets… and what strategies investors and lenders should consider adopting to minimise their risk.