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.

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…

Alistair Darling UK Chancellor of Exchequor

If your monthly mortgage payments are hurting or you are worried how interest rates will rise in the next year or so, then spare a thought for the UK Chancellor of the Exchequer.

In the past month, according to the FT, the increase in 10 year gilt (UK Government bonds) yields has added an extra £7.5bn to his interest rate bill. And, if inflation raises its head, then this will only rise further.

Poor chap.

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.

CEBR – a well respected economic think tank – have predicted that UK interest rates could say as low as 2% for 5 years.

This contrasts with the money market´s view (as discussed in the post on 5 year fixed rates below) that  interest base rates will rise to around 4% in the next 18 to 24 months.

However, this is not good news for property owners – as it would be accompanied by a ´major re-rating in share and property assets´.  In other words, for interest rates to stay low, there would need to be a major decline in property prices. Would 30% decline be major? May be.

So, perversely, UK property investors must be hoping for higher interest rates as this would signal that the declines in property prices would be less.

Either way, UK property is a weak market and offers that allow you to sell on reasonable terms should be taken.