Property Crumble

Okay, cards on the table, what is the Property Crumble UK house price forecast for 2011?

Property Crumble 2011 Property Price Forecast: 3% fall in UK house prices

In the first three months of the year they will show a small gain in January, then drops in February and March followed by positive numbers in April and the spring. The lack of stock in January and developers masking special deals (we’ll buy your old home at an inflated price and add a £20k kitchen) will give the impression of property prices holding up.

The lack of any increase in interest rates in the first half of 2010 will stop the bottom falling out of the market.

However, whilst it is clear to all commentators that by any long term measure UK property remains over valued, equally, no one really benefits from a rapid adjustment to realistic prices.

So, for the UK banks, whose main form of loan collatoral are homes, property prices which are not falling sharply allow them to restructure their balance sheets.

If property prices were to fall sharply, then UK bank’s balance sheets would be in trouble and that would then cause the UK to become another Ireland.

Remember that Ireland’s bail out occurred because private debt (in the form of bank lending) became public debt (in the form of bail outs) to such a degree that international markets doubted the Irish governments ability to continue to borrow.

Therefore, do not expect the UK government nor Bank of England to allow UK property to drop down the plug whole and do all they can to prevent a rapid decline.

However, on the long term view, overly high property values seriously undermine economic productivity as it prevents people moving to areas of employment thereby enshrining economic black spots whilst wage inflation will soar in other ares. Hence, the UK government will also want to allow UK property prices to return to a more sensible level such that the volume of property transaction (a good measure of how easy it is to move) improves.

The level of property transaction is about 50% of normal levels and this will probably fall further in 2011 and stay low until property reaches a sensible price level.

So, even though property prices are not falling, we will see more estate agents shut up offices and / or cancel their advertising spending on portals such as Right Move.

For property prices to fall sharply in 2011 or 2012 there needs to be both a sharp increase in unemployment and interest rates.

Therefore, UK  policy is set to allow unemployment to raise gently in the early part of 2011 whilst disposable income shrinks as a result of VAT and tax rises and high inflation of around 4%.

The higher cost of oil is a policy problem too and this will serve to keep inflation closer to 4% than the target of 2%.

However, if the Bank of England raises rates too quickly, then both property prices will fall sharply, banks will get into trouble and sterling will appreciate creating export weakness and importing inflation, which would then require further increases in interest rates.

Hence, the cycle of raising UK interest rates – as per Euro and Dollar rates – is very scary. No central bank will attempt to raise interest rates until they are very sure of the outcome.

Latest views for 2011 are that interest rates will be held at the incredible low rate of 0.5% until October 2011 and then only rise slowly.

So, a weak winter, slightly better spring – just in postive territory and a slow slide in the Autumn for UK property prices.

All in all? A 3% drop in prices.

However, from the investor point of view, the net drop in prices is actually 8%.

Why?

Firstly, inflation at around 4% a year means house prices would need to rise 4% a year merely to keep pace with inflation – or to be able to buy the same amount of goods in one year’s time.

Secondly, housing is an asset that deteriorates – so expect to spend 1% of the property value on new boilers, repairs to electrics, leaky roofs and burst pipes.

The net loss of property investment value in 2011 will be 8%.

Of course, home owners would have to rent anyway, so this calculation doesn’t apply, their lose will be limited to 4%. However investors have the choice of putting the money in the bank – and that will be a wiser decision than property investment in 2011.

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.

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.

Property Stocks per Chartered Surveyor, Feb 2010, RICS. Property Crumble

UK equities were affected by today’s news that not much is happening with UK property – but that bad news may be on the way.

The number of sales completed in February has fallen and the level of stocks remains fairly level.

Following last month’s fall in mortgage lending, this all points to a state of ‘not much happening’  but there is a warning of deterioration.

Using the graph, based on data from RICS, you can see that the number of properties held on a surveyor/ estate agents’ books rose rapidly during the early stages of the credit crunch Aug 07 to Mar 08. Then, once there was too much property, the over supply was steadily reduced to Jun 09, by falling property prices – around 25% from peak to trough.

In March 09, just a few months before property stock levels bottomed out in June 09, the prices falls ceased and once property stocks found a steady equilibrium, so prices rebounded about 8% over the next 7 months.

So, what do we make of this latest data?

The level of stocks has not changed dramatically, but the number of sales has fallen.

Therefore, the pain of the UK property market is falling on the property estate agents and we may expect to see branch closures and mergers unless those units can switch into an active lettings market.

However, RICS also reported that the rate of new instructions is increasing faster than buyer enquiries. The implication is that we will see an increase in stock levels in the next couple of months and then, we’ll see prices weaken to reflect the level of stock increase – as before.

It would appear, therefore, that low interest rates has encouraged sellers to hold onto property stock for longer than they might otherwise have done so, and look to sell in Spring 2010. Now that the better UK weather is fast approaching, we are seeing a large pent up supply begin to arrive in the market.

Therefore, expectations are that UK property prices will fall and that the spring market will serve to increase the supply, not to increase demand.

So, property prices might stagnate over the next couple of months as sellers and agents hold out for hoped for spring demand and higher prices, only to start to soften by the early summer and fall sharply in the autumn.

It is going to be a very tough year to be an estate agent.

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.

Dubai's Spectacular Property Projects

Dubai – the home of spectacular building projects and endless property investor speculation has hit the rocks.

Dubai is a centrally controlled city state and run by an unelected prince and his executive team.

We don’t need to enter politics here, simply to see that when the Dubai State backed company declares itself unable to pay the interest on its loans, that this means that Dubai itself – and not some nationalised industry – is in deep financial trouble.

We are looking at the risk of the world’s first Sovereign default in the 2007 inspired banking crisis.

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…

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?

Fitch - the ratings agency – is today forecasting a further 20% fall in UK property prices.

Their view is that property needs to drop 30% from its 2007 peak. To date, the decline amounts to only 13% and therefore a further fall from October 2009’s position will follow.

The likes of these reports have been badly wrong before, but this time, the analysis is correct. The difference is unemployment. Property prices have never fallen in a market where employment is growing. Now that the axe will be taken to public sector jobs and the private sector is hardly growing, more unemployment and a greater tolerance for repossessions will drive down property prices… slowly.

Review of 5 year fix deals conducted on 7th Oct 09

This is a selection of the best deals:

Halifax – only for existing borrowers and to 75% loan to value  (if a primary home – holiday homes get 55%)- and stepped increases. Assumes base rates to rise 1% Sept 10 and a further 0.5% in Spring.

Woolwich – for first time buyers and new customers, 5.69% for the length of the loan up to 70% (holiday homes only 50%).

So, holiday homes are toast – they must now be discounted by 20% against an equivalent property in a centre of employment.

Existing borrowers get favourable deals – first time buyers get much worse – this will, over time,  reduce the number of property owners and therefore we can assume that current supply is adequate for the reducing demand.

Base rates will be around 4% within 18 to 24 months. Assuming the spread between the base rate and the mortgage rate of about 150 bps (basis points). Normally, the spread is around 100, but we will assume this will widen as the level of competition in the mortgage market will have reduced sharply.

Property prices are, therefore, going to crumble and there is a short selling window now available.