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.

property price losses in 2011

To date, the average property owner has lost just under £1,900 on his property since Jan 2011.

 

This chart shows the impact of slow property prices coupled with sharply rising inflation. This analysis also assumes a 1% per year maintenance cost. Clearly, for apartments and large detached houses, this cost will often be higher and therefore the losses will be greater.

This analysis is based on an average property value of £162,000.

Therefore, for London based property, where the average price is around double the UK average value, then the losses per average London property will be closer to £3,800.

As forecast UK property prices delivered a miserable performance in the first quarter of 2011.

On the surface, small monthly drops of 0.1% were well masked by the selling and mortgage companies which forgot to include the impact of inflation and overall maintenance costs.

In February 2011, housing prices fell – in real value – at a sharp rate as monthly inflation inceased by just under .8%.

The current position of the Bank of England is to hold fire on raising interest rates – despite 3 of the 9 man team voting for an increase – which means that the bank is content for inflation to do the damage to UK property prices.

Hence, as argued in our 2011 property price forecast, we expect to see an overall drop of 3% in 2011 but a real fall in value of around 8%. To date, the Bank of England’s interest rate strategy has been inline with that prediction and hence we don’t expect to see rate inceases until the Summer at the earliest.

The result is that prices will not only slide gently in 2011, whilst fallling in real value faster, but also we can forecast further property price falls in 2012.

Okay, cards on the table, what is the Property Crumble UK house price forecast for 2011?

Property Crumble 2011 Property Price Forecast: 3% fall in UK house prices

In the first three months of the year they will show a small gain in January, then drops in February and March followed by positive numbers in April and the spring. The lack of stock in January and developers masking special deals (we’ll buy your old home at an inflated price and add a £20k kitchen) will give the impression of property prices holding up.

The lack of any increase in interest rates in the first half of 2010 will stop the bottom falling out of the market.

However, whilst it is clear to all commentators that by any long term measure UK property remains over valued, equally, no one really benefits from a rapid adjustment to realistic prices.

So, for the UK banks, whose main form of loan collatoral are homes, property prices which are not falling sharply allow them to restructure their balance sheets.

If property prices were to fall sharply, then UK bank’s balance sheets would be in trouble and that would then cause the UK to become another Ireland.

Remember that Ireland’s bail out occurred because private debt (in the form of bank lending) became public debt (in the form of bail outs) to such a degree that international markets doubted the Irish governments ability to continue to borrow.

Therefore, do not expect the UK government nor Bank of England to allow UK property to drop down the plug whole and do all they can to prevent a rapid decline.

However, on the long term view, overly high property values seriously undermine economic productivity as it prevents people moving to areas of employment thereby enshrining economic black spots whilst wage inflation will soar in other ares. Hence, the UK government will also want to allow UK property prices to return to a more sensible level such that the volume of property transaction (a good measure of how easy it is to move) improves.

The level of property transaction is about 50% of normal levels and this will probably fall further in 2011 and stay low until property reaches a sensible price level.

So, even though property prices are not falling, we will see more estate agents shut up offices and / or cancel their advertising spending on portals such as Right Move.

For property prices to fall sharply in 2011 or 2012 there needs to be both a sharp increase in unemployment and interest rates.

Therefore, UK  policy is set to allow unemployment to raise gently in the early part of 2011 whilst disposable income shrinks as a result of VAT and tax rises and high inflation of around 4%.

The higher cost of oil is a policy problem too and this will serve to keep inflation closer to 4% than the target of 2%.

However, if the Bank of England raises rates too quickly, then both property prices will fall sharply, banks will get into trouble and sterling will appreciate creating export weakness and importing inflation, which would then require further increases in interest rates.

Hence, the cycle of raising UK interest rates – as per Euro and Dollar rates – is very scary. No central bank will attempt to raise interest rates until they are very sure of the outcome.

Latest views for 2011 are that interest rates will be held at the incredible low rate of 0.5% until October 2011 and then only rise slowly.

So, a weak winter, slightly better spring – just in postive territory and a slow slide in the Autumn for UK property prices.

All in all? A 3% drop in prices.

However, from the investor point of view, the net drop in prices is actually 8%.

Why?

Firstly, inflation at around 4% a year means house prices would need to rise 4% a year merely to keep pace with inflation – or to be able to buy the same amount of goods in one year’s time.

Secondly, housing is an asset that deteriorates – so expect to spend 1% of the property value on new boilers, repairs to electrics, leaky roofs and burst pipes.

The net loss of property investment value in 2011 will be 8%.

Of course, home owners would have to rent anyway, so this calculation doesn’t apply, their lose will be limited to 4%. However investors have the choice of putting the money in the bank – and that will be a wiser decision than property investment in 2011.

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…).

Read more…

This chart shows why UK house prices will fall in 2011 (click to enlarge).

We’ve seen two significant periods in UK housing demand since 2007. Firstly , the 25% fall in UK property prices in 2008 was driven by a collapse in demand which began in late 2007.

Secondly, the 2009 recovery (of around 8 to 10%) was driven by lack of supply.

We are now clearly into a third and relatively new phase – following the abolishing of HIPS plus increased tax on capital gains, which has pushed up supply of property sharply (vendor instructions) just as tax rises and weaker job prospects cut back demand.

Almost certainly, 2011will be a year of falling property prices and nearly every property price forecast is predicting this.

2010 property prices will end down too.

The key question is what will happen to prices in 2012? Well, demand, not supply is now the key measure which will either undermine or support property prices. And demand will be strongly influenced by mortgage rates, unemployment prospects and net take home pay.

Needless to say, it is unlikely that any of these three factors will be significantly stronger in 2012 than 2010.

Only London and North West surveyors remained confident over the past 3 months according to the July 2010 RICS survey.

Last month survey showed us that South East England property stocks capitulated and this month the South East surveyors turned negative, for the first time, in their forecast for house prices for the rest of 2010.

All UK regions, including London, are now expecting property prices to fall in the next 3 months.

Sentiment is worst in West and East Midland and better in London, North and North West – but all regions, on balance, believe prices will fall during the rest of 2010.

Given that surveyors wouldn’t normally choose to talk the market down, this is a significant result and shows property price prospects have dimmed sharply.

Secondly, one of the more optimistic regions, the North West, has been reporting higher levels of expected sales than the number of sales actually achieved. Sooner or later reality has to catch up with hope and hence, when this occurs we can expect a further dimming of prospects for 2010 and 2011.

In the meantime, things are cooking up for a sharper fall in property prices.

Firstly, new buyer enquiries continue to fall moderately across the UK. The number of property sales is falling too, now at around 15 sales per surveyor, the lowest point in 10 years except during the very sharp fall in 2009. However other RICS data suggests we might reach the low levels of of property sales in 2009 again, sometime in 2011.

In the meantime, the number of new vendor instructions has rocketed. The July 2010 rate of increase has passed all previous 10 years peaks except the hike in late 2007. It seems owners and investors are rushing to the market to off load property as quickly as they can.

In the meantime, the number of unsold properties is now at 69 up from 66 in June and 62 in May.

The Autumn will be a torrid time for property sellers but is still too early for investors to consider entering the market.

The only good news is that interest rates are likely to remain low until 2011, but during 2011 rates will have to rise to around 2.5% and an increase of 2% and this will probably add around 50% to an average variable monthly mortgage bill.

Hence, it is clear that property prices will fall in the remainder of 2010 and all house price forecasts will predict a continuing slide in 2011.

As regular readers of this property price blog will know, we closely follow the supply and demand in UK property to see where property and house prices might head in 2010 and what we might forecast for 2011 property prices.

So the latest news that the South East of England’s property market has capitulated is important news for 2011 forecasts.

Essentially, for most of 2010 the UK has run two property markets London and the South East plus the rest of the UK.

London and the South East have had relatively healthy property markets and London surveyors report a stock of around 30 against a national average of 67 and levels above 90 in the North West, Yorkshire – Humberside and West Midlands regions (Wales has over 140).

The South East – until June – had been performing very closely to the London model – very low stock, steady sales and steady price rises since 2009, but in June we see the first signs of capitulation in the latest data from RICS (published mid July 2010).

In this new data we see the number of buyer enquires falling, stock levels rising rapidly and most concerning of all, the number of completed sales collapsing towards a low not reached since march 2009 when property prices fell 25%.

London too is showing a slow down in sales and enquiries but its stock levels are so low, at 30, that things need to get  a lot worse before we’ll see significant price falls in the capital.

However, now that the South East’s performance is mirroring that of the rest of the country we can expect to see the countrywide averages turn negative and as that does, so will people’s expections.

Surveyors are already reporting that the Euro crisis, followed by the emergency budget followed by the World Cup have already dented confidence and it seems that those responses are now showing up in the early data.

At the same time, economic forecasters are now polishing off their worst case scenario property price forcasts for 2011 with predictions of a 30% fall in prices becoming the norm (latest from National Institute of Economic and Social Research).

Will this happen? Well, not in London for sure.

The most likely national average property price fall will be around 10% to 15% by April 2011. However, that will mask two things.

Firstly, London will fall perhaps 5% to 10% and other parts of the UK will fall more dramatically – perhaps 15 to 25% and these regions, in order of risk, would be

1. Wales
2. Yorkshire & Humberside
3. West Midlands
4. North West 
5. East Anglia

Secondly, the only properties currently selling are prime properties – ie. those that have a better aspect or larger garden or better condition than the average. The rest of the housing stock of average or ordinary houses that normally sell during a boom period aren’t shifting at all.

So, the more modest falls in headline prices mask that fact that only superior properties are selling and the massive regional variations.

Now, equally, the falls might be delayed or sped up depending on when the first rise in interest rates is applied by the Bank of England,  but nevertheless, in nearly all cases, with perhaps the exception of those parts of the London market which are driven by global economic performance, the value of a property at the end of 2011 will be at or below the value of the same property in 2004.

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.