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.

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.

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.

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?

Scary news reported today on CNN Money that job loses in the US may have been 800,000 higher than previously estimated.

So, instead of 7.2m jobs lost, the figure is now 8m.

It is called a revision and suggests that the figures we read about in the news are not only out of date by the time we read them, but that what we experience ourselves is a more accurate indicator much of the time.

For most of 2009, on the street, US and UK people keenly felt the loss or risk of loss of jobs. The figures in both countries, but especially in the UK, much lower than expected.

Nevertheless, we are beginning to get explanations for this starting with the revised calculations in the US and predictions that the UK’s unemployment rate will rise from 7.9% to 9%, despite the country narrowly escaping recession.

Either way, the higher ‘actual’ or delayed job figures is a clear downward indicator for property prices in the US and UK.

In the UK, interest rate cuts since the start of the crisis have delivered the average £103,000 floating rate mortgage holder an annual saving of £4,635. Against that, the government estimates the net cost of bailing out the financial system at £10bn – or £400 per household.

In truth the same mortgage support has been provided to homes in economies across the developed world.

And, whilst economists don´t know how or when that support will be removed, there is little doubt that it will be removed and hence house prices face a major deflationary impact sometime in the near future.

Will Property Prices be Crisp or Soggy in 2010

Economies that were dead on their feet have been brought back to life.

However, it wouldn´t be until 2010 unfolds that we´ll know whether we simply have a zombie like economy or whether there really is a fresh economic start?

2010 is the year in which, even if the UK or US Governments don´t wish it, the markets will require the paying down of Government Debt to begin. It is the year during which government funded projects will be cut back or delayed, reducing spending and bringing the unemployment axe to the public sector.

The public sector in developed European countries is thought to employ directly (or indirectly) at least 50% of the workforce.

For instance, in the UK, around 20% of the workforce are paid directly by the government (ie work in the NHS, Schools or Local Government) but a further 30% work for companies that are dependent on government money (ie government agencies or private businesses that are the recipients of that government money).

The axe is most likely to fall on the private companies working for government – because that is where it can most easily fall. And, fall it will.

Therefore, 2010 will see modest but continuing increases in unemployment in the UK. The savings index is likely to remain strong as people save money to cover the risk of employment, the knowledge of future tax rises due in 2011 and the need or desire to keep paying down debt.

The steady growth of unemployment in the UK and other developed European countries will keep the lid firmly on property price rises.

The best we can hope for is that 2010 is not an exciting year for property, as all exciting property news in 2010 is likely to be bad news.