Property Crumble

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.

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.

House Price Growth Slows says FT (4th Feb) vs House Prices Rise Sharply in January says FT (29th Jan) just 6 days earlier.

How did the FT do it? On the 4th of Feb they told us that ‘house prices rose at their slowest pace in six months in January according to a closely watched index (Halifax)… adding to signs that the rapid pace of recovery may be slowing’

Yet only a week before on 29th Jan the FT told us ‘UK house prices posted strong gains in January according to a closely watched index‘ (Nationwide).

So what is going on?

Well, one closely watched index samples from late December to late January and reported in January – that said house prices were going up.

The other closely watched index, reporting in early Feb, measured price changes in January only – not December – and that told us the price rises were slowing down and the prospects looked weak.

The trouble is that the FT didn’t clearly distinguish one index from another and told us that both indices are ‘closely watched’.

This  reporting might be acceptable on a cheap newspaper, but its appearance on a quality financial paper suggests either that the we’ve all grown rather bored of property prices indices and just reprint the press releases or the press releases are able to baffle the bright journalists at top business newspapers.

The interesting story, of course,  is not the latest report on house prices, but the volatility of the different indices. Typically, when the market is moving in the same direction, the indices are either both positive or both negative.

What is new is that we have a marketin which the indices are going in different directions.

This index conflict could be down to either

a) each index measures a similar sample of the market (or it is able to statistically adjust the figures to ensure it is not biased) in which case, the difference must be a result of the positive growth index taking an earlier sample and the negative index taking a later sample.,

If this is the case, then we must conclude the UK property market has turned negative in early Jan.

or

b) the positive index is measuring the sector of the UK property market that is making sales and achieving better sales than last year whilst the negative index shows that there are other parts of the market that are falling.

Or possible, a combination of the two.

Who knows, but it is instructive nevertheless to know that what we hear about property is simply regurgitated without any critical analysis or thinking.

And that property price indices are most interesting when the disagree.

Next month, we shall watch carefully to see if either index has switch from positive to negative (or vice versa) or if they continue to disagree…. from which we should be able to conclude that either the market has turned or that each index samples a different sector of the market.

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.

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

Read more…

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…

The pay freeze announced by the current Labour Government will reduce after tax disposable income for over half the working force of the UK. This is because such a large part of the UK workforce is now employed by the Government or a Government organisation.

And, ultimately, property and mortgages are always paid out of post tax disposable income – for which this latest action will be to slowly reduce – and propety prices will therefore have to follow, eventually.

As there is no wage crash, so there will be no accompaning property price crash, just a slow and soft deflation.

Property prices won’t crash but they won’t boom either. Instead they will slowly crumble but with occaisional sunny spells.

The ex Property Secrets team, lay out their forecast for what will happen to property in the developed western markets… and what strategies investors and lenders should consider adopting to minimise their risk.