Property Crumble

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.