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.

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.

UK Property Prices - Slowly Sliding?

Nationwide’s index reported a modest increase in UK property prices in the February to March 2010 period.

At the same time, the US Schiller index reported weak US property prices amid growing consumer confidence.

The UK’s chancellor also announce an attempt to reflate the UK property bubble by suspending stamp duty for first time buyers on properties up to £250,000.

So what is happening?

Firstly, property prices are not collapsing or falling significantly (as per the index) however, the  number of mortgage approvals is still very low and there are clear suggestions that only the ‘best in the road’ properties are selling with all other less attractive options unable to obtain a buyer.

This flight to quality means that the indices will in effect compare the prices of the weaker properties (which sold in a strong market) with the stronger properties which are still selling in a weak market (unlike their weaker cousins).

What do we mean by weak property?

Well, simply properties that need work doing to them – or lack basics such as double glazing or where the wiring is a bit old, or it may simply by that the stronger properties are being sold with display furniture from the developer and so forth.

All of these subtleties are lost by the indices and explain why the indices don’t drop as much as it feels they ought to in a weak market. Or, why the indices don’t manage to reflect the real experience of property buyers and sellers.

Secondly, the US is reporting, at the end of march, more positive news on consumer confidence with an expecting increase in employment – however, the US property price forecasts remain on the slightly negative side.

This suggests that we could see growing consumer confidence coupled with stagnant or weak house prices. And, if the much anticipated inflationary pressures get stoked in either the UK or US, then house prices will fall in real terms.

Halifax Property Price Index comes out on top

We now have the two main indices – Nationwide and Halifax – giving the same readings – and that is of on-going weakness in the UK property markets.

There was a thought that given the diverging results of these two indices in January, that they must be measuring different sectors of the market.

However, now that are both delivering the same results, we can reasonably assume that the difference was the sample period – and that the UK property prices turned negative around the end of December 2009 / beginning of January 2010.

Equally, the property price falls are now in line with the economic fundamentals of weak employment, negative growth in disposable income and weak mortgage availability.

So, will property price pick up in the Spring? This is unlikely, not least because elections add to the feeling of uncertainty and won’t help chains of buyers and sellers to have the confidence to complete.

Nevertheless, in these recent results the Halifax index has shown that it is more up-to-date, as it reported the Dec / Jan price fall at the beginning of February, whilst Nationwide didn’t report a fall until the end of February.

So, to see if there is any change of direction in spring property prices, we need to follow the Halifax index.

Scary news reported today on CNN Money that job loses in the US may have been 800,000 higher than previously estimated.

So, instead of 7.2m jobs lost, the figure is now 8m.

It is called a revision and suggests that the figures we read about in the news are not only out of date by the time we read them, but that what we experience ourselves is a more accurate indicator much of the time.

For most of 2009, on the street, US and UK people keenly felt the loss or risk of loss of jobs. The figures in both countries, but especially in the UK, much lower than expected.

Nevertheless, we are beginning to get explanations for this starting with the revised calculations in the US and predictions that the UK’s unemployment rate will rise from 7.9% to 9%, despite the country narrowly escaping recession.

Either way, the higher ‘actual’ or delayed job figures is a clear downward indicator for property prices in the US and UK.

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.

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.

Read more…