Property Crumble

This graph tells the full story anout UK property prices in 2009.

No, it is not a graph of property prices, but of the two measures of inflation used in the UK.

The modest inflation – or CPI – is used to set interest rates and dipped last year but remained positive.

The more volatile inflation – RPI – dropped rapidly last year and gave the UK economy 9 months of deflation.

Only, the deflation fact was kept firmly in the bag because no one uses (or talks about) RPI any more.

So, what is the difference? Essentially RPI includes the cost of housing including an average mortgage. Even though nearly everyone either has no mortgage or a much larger mortgage.

Hence as mortgage costs dropped due to the interest rate cuts, so this RPI measure fell sharply. Ordinary consumers - especially those with large mortgages –  must have felt a sudden surge in the cash available in their wallets and an increase in their willingness to spend it.

So, housing demand rose and prices stabilised and even lifted around 10% from the year’s low point in March 2009.

But what does the graph tell us now? It shows rapidly rising RPI and CPI inflation in December 2009. In other words the benefit of the sharp drop in interest rates is falling out of the figures and therefore the new inflation figures show what is happening in the world outside of housing. And the picture painted is one of rapidly rising inflation.

Now, the next step in the 2010 scenario is that the Bank of England may have to start tightening interest rates, which will make the RPI figure rise much higher and faster.

The interesting comparison is that fall in RPI last year mirrors the pick up in the property market.

And the rise in RPI this year mirrors the fact that houses sold before Christmas are falling through and ’sold’ stock is coming back onto the market just as demand is perishing.

Property prices are already falling for the simply reason that sales have stagnated and there is little prospect of an increase as the cost of living rises sharply couple with gradual tax rises through the year and into 2011.

House Under Threat

UK Property prices recorded their 4th consecutive rise in October.

However, the medium and short term forecasts are darkening quickly.

Firstly, the grow of unemployment is continuing and as expected, is a lagging indicator. That means unemployment still grows even when an economy pulls out of recession. The UK is not yet out of recession either.

Secondly, the US Fed and the Bank of England are hinting that inflation may require them to raise interest rates in 6 months time – or possibly sooner.

The positive news on the economy since March 2009 has lead to increased inflation expectations.

At the same time, the depth of problems in major high street banks such as RBS in the UK are becoming apparent.

Lastly, the public sector job cuts that are required to balance the books in the US and UK are being held back to avoid damaging a weak recovery or, in the UK’s case, until the election is out of the way next June.

However, those job cuts will come. And will impact on half of the UK’s workforce – the sector that has until now been immune from the recession.

Therefore, we are forecasting rising unemployment, a lift in interest and mortgage rates coupled with a weakness of high street banks to lend.

Therefore, the medium term future for UK property is an ongoing slow down.

The winter is usually the time when property prices turn negative and whilst the downturn will probably be gentle, the prospects for 2010 are no better.

Therefore, we remain very negative on UK property over the short and medium term and negative to neutral over the long term.

The third month of UK property price rises should act as a warning of what is to come and not a reason to celebrate.

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?