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.

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%.

UK Property Stocks Mar 2010 source RICS, Property Crumble

UK Property stocks are on the rise as this months graph shows.

Currently, the average stock per surveyor is around 67 and you can see that the last trigger point for a property price crash was in late 2008 when property stocks reached 90 per surveyor.

Therefore, we have a long way to go until a sharp price in UK property prices is triggered – but we should expect further increases in stocks over the next 12 months as the number of new instructions is increasing faster than the number of new buyer enquiries.

The risks between a property crumble, property price stumble or all out property price crash are fairly evenly balanced, with the property crumble the most likely scenario, but all three being realistic possibilities.

Either way, the forecasting commentary from house price economists is turning more and more negative.

Pretty much as predicted, the supply of property in the UK market has continued to increase according the the latest RICS survey, and no, the expected buyers have not materialised.

On an anecdotal level, I counted 21 For Sale boards – many of them new – on my way into work this morning and only 1 Sold sign (and that was sold before Christmas anyway).

Latest mortgage figures show that there has been no significant increase in lending – so, not surprisingly, buyers are not able to bid up prices and the property chains are collapsing.

We’ll provide more analysis shortly on the latest supply figures, but April is traditionally the best month for UK property sales and hence a weak April bodes for further price falls during 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.

Property Stocks per Chartered Surveyor, Feb 2010, RICS. Property Crumble

UK equities were affected by today’s news that not much is happening with UK property – but that bad news may be on the way.

The number of sales completed in February has fallen and the level of stocks remains fairly level.

Following last month’s fall in mortgage lending, this all points to a state of ‘not much happening’  but there is a warning of deterioration.

Using the graph, based on data from RICS, you can see that the number of properties held on a surveyor/ estate agents’ books rose rapidly during the early stages of the credit crunch Aug 07 to Mar 08. Then, once there was too much property, the over supply was steadily reduced to Jun 09, by falling property prices – around 25% from peak to trough.

In March 09, just a few months before property stock levels bottomed out in June 09, the prices falls ceased and once property stocks found a steady equilibrium, so prices rebounded about 8% over the next 7 months.

So, what do we make of this latest data?

The level of stocks has not changed dramatically, but the number of sales has fallen.

Therefore, the pain of the UK property market is falling on the property estate agents and we may expect to see branch closures and mergers unless those units can switch into an active lettings market.

However, RICS also reported that the rate of new instructions is increasing faster than buyer enquiries. The implication is that we will see an increase in stock levels in the next couple of months and then, we’ll see prices weaken to reflect the level of stock increase – as before.

It would appear, therefore, that low interest rates has encouraged sellers to hold onto property stock for longer than they might otherwise have done so, and look to sell in Spring 2010. Now that the better UK weather is fast approaching, we are seeing a large pent up supply begin to arrive in the market.

Therefore, expectations are that UK property prices will fall and that the spring market will serve to increase the supply, not to increase demand.

So, property prices might stagnate over the next couple of months as sellers and agents hold out for hoped for spring demand and higher prices, only to start to soften by the early summer and fall sharply in the autumn.

It is going to be a very tough year to be an estate agent.

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.

Nationwide's Chief Economist

The Nationwide’s UK property price index turned negative at the end of January and early February pricking the balloon of positive property price news.

Last month we reported diverging results from the two key UK indices – with Nationwide showing property price growth and Halifax showing a decline.

The fact that Nationwide sources data from an earlier period suggests that Halifax will also produce negative growth figures for UK property in a couple of weeks time.

Once again, the fact that the market turned negative in January was disguised by the indices which delivered a mixed message last month.

Therefore, the indices continue to provide a backward view on property prices and little basis for projecting forward growth.

Why do we say this? Well, Martin Gahbauer, Nationwide’s Chief Economist claims the fall in the February figures was due to the icy weather and the ending of the stamp duty incentive on 31st December.

What is interesting about this comment is that events that took place at the end of December and early January are cited as the reason for the falling in the February price indices. Equally, wouldn’t poor weather normally reduce sales volumes rather than reduce property prices? The fact that prices fall when volume falls suggest that sellers are willing to reduce prices and that this may continue even when the weather improves.

This tells us that the indices are effectively reporting on the market of 2 months ago – and not on the current state of affair.

It would be better then to say that prices have been falling since the end of December 2009 and as the talk of interest rate rises increases and uncertainty about an election looms, are there any brave voices willing to predict a pick up in the Spring?