Property Crumble

This graph tells the full story anout UK property prices in 2009.

No, it is not a graph of property prices, but of the two measures of inflation used in the UK.

The modest inflation – or CPI – is used to set interest rates and dipped last year but remained positive.

The more volatile inflation – RPI – dropped rapidly last year and gave the UK economy 9 months of deflation.

Only, the deflation fact was kept firmly in the bag because no one uses (or talks about) RPI any more.

So, what is the difference? Essentially RPI includes the cost of housing including an average mortgage. Even though nearly everyone either has no mortgage or a much larger mortgage.

Hence as mortgage costs dropped due to the interest rate cuts, so this RPI measure fell sharply. Ordinary consumers - especially those with large mortgages –  must have felt a sudden surge in the cash available in their wallets and an increase in their willingness to spend it.

So, housing demand rose and prices stabilised and even lifted around 10% from the year’s low point in March 2009.

But what does the graph tell us now? It shows rapidly rising RPI and CPI inflation in December 2009. In other words the benefit of the sharp drop in interest rates is falling out of the figures and therefore the new inflation figures show what is happening in the world outside of housing. And the picture painted is one of rapidly rising inflation.

Now, the next step in the 2010 scenario is that the Bank of England may have to start tightening interest rates, which will make the RPI figure rise much higher and faster.

The interesting comparison is that fall in RPI last year mirrors the pick up in the property market.

And the rise in RPI this year mirrors the fact that houses sold before Christmas are falling through and ’sold’ stock is coming back onto the market just as demand is perishing.

Property prices are already falling for the simply reason that sales have stagnated and there is little prospect of an increase as the cost of living rises sharply couple with gradual tax rises through the year and into 2011.

Yesterday, 25th of January, figures were released showing that US sales of existing homes fell by 16.7% in December compared with a rise of 7.4% in November. It was reported that the drop was larger than expected, but perhaps journalists have been talking to the wrong people?

In the UK, interest rate cuts since the start of the crisis have delivered the average £103,000 floating rate mortgage holder an annual saving of £4,635. Against that, the government estimates the net cost of bailing out the financial system at £10bn – or £400 per household.

In truth the same mortgage support has been provided to homes in economies across the developed world.

And, whilst economists don´t know how or when that support will be removed, there is little doubt that it will be removed and hence house prices face a major deflationary impact sometime in the near future.

Will Property Prices be Crisp or Soggy in 2010

Economies that were dead on their feet have been brought back to life.

However, it wouldn´t be until 2010 unfolds that we´ll know whether we simply have a zombie like economy or whether there really is a fresh economic start?

2010 is the year in which, even if the UK or US Governments don´t wish it, the markets will require the paying down of Government Debt to begin. It is the year during which government funded projects will be cut back or delayed, reducing spending and bringing the unemployment axe to the public sector.

The public sector in developed European countries is thought to employ directly (or indirectly) at least 50% of the workforce.

For instance, in the UK, around 20% of the workforce are paid directly by the government (ie work in the NHS, Schools or Local Government) but a further 30% work for companies that are dependent on government money (ie government agencies or private businesses that are the recipients of that government money).

The axe is most likely to fall on the private companies working for government – because that is where it can most easily fall. And, fall it will.

Therefore, 2010 will see modest but continuing increases in unemployment in the UK. The savings index is likely to remain strong as people save money to cover the risk of employment, the knowledge of future tax rises due in 2011 and the need or desire to keep paying down debt.

The steady growth of unemployment in the UK and other developed European countries will keep the lid firmly on property price rises.

The best we can hope for is that 2010 is not an exciting year for property, as all exciting property news in 2010 is likely to be bad news.

How much will these houses cost in 2010?

At the end of December 2009, the UK Government withdrew its tax relief on home in the first and second time buyer price bracket (125,000 GBP to 175,000 GBP) and it was accompanied by a reported 0.4% price rise in UK property prices in Dec 2009 by Nationwide and a 2.2% drop recorded by Rightove.

Nationwide´s modest rise is slightly down on the 0.5% rise in November whilst rightmove reported a sharper fall of 2.2% against 1.6% in November.

So, the housing market is either weak or weaking.

The question is, to what were he weak prices supported by buyers pull forward their purchases in order to avoid the stamp duty due from 1st of Jan 2010?

Is this the housing equivalent of the cash for clunkers deal for cars?

The answer is probably not. Yes, the volume of property sales in the lower price brackets (below 250,000 GBP) held up well, but it fell sharply in the higher price brackets where sales volumes were much lower and prices softened rather than firmed (as they did in the lower price groups).

2010 is likely to find that sales volumes in the lower price range will fall and prices will soften as Goverment support is withdrawn and the modest effect of home purchases brought forward takes its effect.

However, the real question we need to ask when forecasting short term property prices (ie upto 1 year) is what will happen to interest rates?

We don´t know, but we do know this about 2010

• Government debt default (perhaps by Greece or Dubai or another hidden gem) is a real possibility that we will live with all year (even if it doesn´t happen)
• UK and US Governments will come under increased pressure to deal with their debt
• The dollar may rise as it is seen as a safe haven, which might mean US interest rates lift
• UK Commercial property refinance needs could derail two major UK banks and create a new banking crisis and forcing UK interest rates higher and derailing UK residential property prices
• UK Tax hikes will not take affect in 2010 but in 2011, thereby putting further downward pressure in UK property towards the end of 2010.

Okay, we can only conclude that the risk for interest rates is an upward move. Essentially, if something really good happens, then interest rates will rise – in both the UK and US , and if something really bad happens, interest rates will rise.

Therefore, low and stable interest rates are dependent on a very stable and low growth economic scenario.

Therefore, the best that might be hoped for is a modest 3 to 4% increase in property prices, but with the equal risk of a fall of 10 to 15%. Albeit, you can expect the wide divergence in property price indexes to continue.

The result is likely to be somewhere in the middle, but the risk for property prices is clearly on the downside.