Property Crumble

RICS has just provided its house and property price forecast for 2012 and it is zero percent.

We tend to agree with this, although we have a slightly more negative view.

The real issue, as the graph shows,  is that real wages are falling (driven down by inflation) and therefore, even a zero percent change in property prices in 2012 reflects a fall in real value (ie. the same amount of money will buy less at the end of 2012 than it will at the beginning).

The RICS  forecast for 2012 has unemployment edging upwards which will dampen demand and result in weak property price demand.

The only reason the bottom isn’t falling out of the housing market in 2011 or 2012 is because interest rates are being kept at the incredible low rate of 0.5%.

In 2013, from February or March, the central banks have given notice that they will start to raise rates. How and when that happens will impact on the property market and house prices.

We expect that for political and macro economic reasons (ie tax payers not wanting to bail out failed banks with too many badly priced mortgages) the rates will be kept low long enough to allow banks to recover (and / or raise money) and slowly write down their debts.

Either way, we are looking at negative property price growth of around 3% for 2011 and zero for 2012. Although, we wouldn’t be surprised if property prices in 2012 actually fell by 3% in nominal value and around 5.5% in real terms (adjusted for inflation).

No matter how you look at it, with London property prices now weakening, there is no investment prospect for property in 2011 or 2012 either.

Keep your cash in the bank on long term deposit, or if you have too much, then look at business angel investment.

The property price gloom mongers are among us.

The nights are drawing in and the hoped for (hoped for? who ever beleived this?) pick up in US and UK housing markets in the Autumn failed to materialise.

Earlier this month, the UK’s Halifax reported monthly falls of 3% in average property values – a huge decline. Whilst fellow mortgage lender and property price index tracker, Nationwide, reported just 0.1%.

In mid/late October bank stocks began their 3rd quarter reporting season – profits sharply down, concerns over the mortgage book and stock prices taking a hit.

Now then, does this put us in place for a 30% decline in property prices? Should forecasts for 2011 of a 30% property price drop be believed?

No.

It’s not that bad.

Don’t forget that the central banks – US Fed, UK Bank of England and Euro Central bank – have all been withdrawing from their various forms of printing money (know as quantitive easing in some cases or special liquidity rules etc…).

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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.

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.

Commercial Property Time Bomb?

The affect of the commercial property sector – which is linked to the health of companies using warehousing, offices or retail space – on the residential property sector should be negligible.

Sadly, this decoupled effect isn’t going to work in this property recession.

Here’s why:

Residential property values are closely linked to the ability and willingness of banks to lend or issue residential property mortgages (okay, also known as home buyer mortgages).

The growth in prices in the US and UK and other developed western European economies since 2004 has largely been a result of increased credit and not fundamental shifts in demand or capacity to purchase.

Therefore, the role of finance in determining property prices has grown significantly in the past 5 years such that what affects the banks now directly and significantly affects the availability and price of residential mortgages and therefore house prices.

Remember that at the peak in 2007,

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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!

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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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.

Charles Bean, deputy governor of the Bank of England, released a statement this week which stated that “the recovery in confidence and rise in asset prices since the start of its quantitative easing had been significant”.

He appears, in the language of central bankers, to be saying that quantitative easing (or printing money) has lifted the price of residential property, commercial and other assets.

Interesting.

He is saying, therefore, that the rise in those assets has been artificially stimulated and that at some point that stimulation will be withdrawn?

One can only presume a gradual withdraw and therefore a gradual reduction in those asset prices. A slow crumble, then?