Property Crumble

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%.