Property Crumble

Dubai's Spectacular Property Projects

Dubai – the home of spectacular building projects and endless property investor speculation has hit the rocks.

Dubai is a centrally controlled city state and run by an unelected prince and his executive team.

We don’t need to enter politics here, simply to see that when the Dubai State backed company declares itself unable to pay the interest on its loans, that this means that Dubai itself – and not some nationalised industry – is in deep financial trouble.

We are looking at the risk of the world’s first Sovereign default in the 2007 inspired banking crisis.

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According to the FT today, investors selling Chinese stocks believe that Chinese banks need to raise more cash.

Don’t look now but it appears that China’s GDP growth has been fuelled with credit expansion that is now going to be withdrawn.

Falling asset prices in the world’s economic engine is about as scary as it gets. Ooops!

Latest US data shows the rate of property price rises slowed in September despite the extension of the first time buyer tax credit to the new year.

US Property Prices Sept 09 - Case-Shiller

The slowing growth rate was accompanied by a down grade in US GDP figures as the broader US economy was incorporated into the earlier growth estimates which are largely based on international businesses.

David Blitzer of S&P commented that “the gains in the most recent
month are more modest than during the seasonally strong summer months. Fewer cities saw month to month improvements in September than in August in both seasonally adjusted and unadjusted figures.”

However, these figures mask wide variations with “Las Vegas remaining the most depressed market. Prices have declined for 37 consecutive months, with a
peak-to-trough reading of -55.4%.

“Detroit has seen some positive movement in recent months, [yet] the market is still at only 73% of its 2000 value. This compares to regions such as Los Angeles, New York and Washington, which have maintained values of 70-80% above their 2000 averages, in spite of the market downturn.”

The gap between the successful and unsuccessful locations and regions appears to widening although it is worth noting that Government car giant bail outs has almost certainly prevented Detroit from a property price freefall. However, there is no respite for Las Vegas speculators and the market shows clear signs of a flight to quality.

Graham Beale Nationwide Chief Exec

Graham Beale, CEO of major UK building society, The Nationwide, today predicted that
 

“… [UK] Economic recovery is forecast to be slow and we expect interest rates to remain at their current level until at least the fourth quarter of 2010.

And his UK house price forecast…. 

“We are also cautious on future prospects for the housing market. The growth in house prices over recent months appears to be driven by lack of supply, and growth in unemployment throughout 2010 will inevitably exert downward pressure on house prices.

In addition, he complained that the UK

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5 year fixed rate mortgages have improved since we last tested the mortgage market one month ago.

The Woolwich has reduced its 5 year fix by 0.2% but is maintaining the 70% LTV (loan to value) ceiling.

In addition a number of new products have been launched into the market setting the median competitive rate at 5.49%, the same as the Woolwich, but at a slightly higher LTV of 75%.

The fact that the Newcastle has launched below 5% can be taken as a sign that banks are willing to squeeze margin to gain business, which is a sign of the mortgage market returning health rather than a rapid drop in 5 year interest rate forecasts.

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UK Employment Rate to Sept 09

UK Employment dropped just 0.1% over the summer to end at 72.5.

The unemployment rate increased just 30,000 to reach 2.46m.

So everything is fine in the UK economy?

Perhaps not.

There are two issues here.

Firstly, the number of people working part-time has increased to nearly 1m. This is the highest figure since records were begun in 1992.

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Anyone looking for evidence that current property demand, and therefore prices, are supported by government stimuli need look no further than the US.

Reported in the Economist last week we had

Home re-sales up by 9.4% in September
New home sales dopped unexpectedly

Why? Simply, the resales spike was caused by a rush to complete in time to take advantage of a tax credit that is about to expire.

So, what will happen next month? Almost certainly there will be a sharp fall in re-sales as any sales in the pipeline would have been brought forward to meet the tax credit deadline.

Therefore, next month expect dire new and re-sale house data from the US.

The October results will give us a clear picture of how sharply a market falls once the government induced stimuli disappear.

Alistair Darling UK Chancellor of Exchequor

If your monthly mortgage payments are hurting or you are worried how interest rates will rise in the next year or so, then spare a thought for the UK Chancellor of the Exchequer.

In the past month, according to the FT, the increase in 10 year gilt (UK Government bonds) yields has added an extra £7.5bn to his interest rate bill. And, if inflation raises its head, then this will only rise further.

Poor chap.

Latest US jobs data show that 10.2% of the US workforce is now out of work.

This was worse than analysts projections and means that medium term house price forecasts will now be turned slightly further to the negative side as the faster than expected growth in unemployment is factored back into the property price forecasts.

In the UK things look worse with the economy failing to pull out of recession, unemployment continuing to rise and local insolvency practitioners working harder than ever.

Insolvency practitioners are the undertakers of the business world and this year they have been exceptionally busy and in the words of one practitioners are ’seeing a lot of good entrepreneurial businesses go bust’.

This is steadily destroying the ability of the economy to meet demand in the future. In the future it won’t be there and instead we will either have anemic growth or high inflation – and possibly both.

And, such conditions coupled with high and persistent unemployment will drain the property market of buyers and hurt their affordability. This will create a sustained downward pressure on property prices in the UK and US.

House Under Threat

UK Property prices recorded their 4th consecutive rise in October.

However, the medium and short term forecasts are darkening quickly.

Firstly, the grow of unemployment is continuing and as expected, is a lagging indicator. That means unemployment still grows even when an economy pulls out of recession. The UK is not yet out of recession either.

Secondly, the US Fed and the Bank of England are hinting that inflation may require them to raise interest rates in 6 months time – or possibly sooner.

The positive news on the economy since March 2009 has lead to increased inflation expectations.

At the same time, the depth of problems in major high street banks such as RBS in the UK are becoming apparent.

Lastly, the public sector job cuts that are required to balance the books in the US and UK are being held back to avoid damaging a weak recovery or, in the UK’s case, until the election is out of the way next June.

However, those job cuts will come. And will impact on half of the UK’s workforce – the sector that has until now been immune from the recession.

Therefore, we are forecasting rising unemployment, a lift in interest and mortgage rates coupled with a weakness of high street banks to lend.

Therefore, the medium term future for UK property is an ongoing slow down.

The winter is usually the time when property prices turn negative and whilst the downturn will probably be gentle, the prospects for 2010 are no better.

Therefore, we remain very negative on UK property over the short and medium term and negative to neutral over the long term.

The third month of UK property price rises should act as a warning of what is to come and not a reason to celebrate.