Property Crumble

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.

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?

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.

5 year fixed rate mortgages have improved since we last tested the mortgage market one month ago.

The Woolwich has reduced its 5 year fix by 0.2% but is maintaining the 70% LTV (loan to value) ceiling.

In addition a number of new products have been launched into the market setting the median competitive rate at 5.49%, the same as the Woolwich, but at a slightly higher LTV of 75%.

The fact that the Newcastle has launched below 5% can be taken as a sign that banks are willing to squeeze margin to gain business, which is a sign of the mortgage market returning health rather than a rapid drop in 5 year interest rate forecasts.

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