Property Crumble

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?

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.

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.

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.

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.

How much will these houses cost in 2010?

At the end of December 2009, the UK Government withdrew its tax relief on home in the first and second time buyer price bracket (125,000 GBP to 175,000 GBP) and it was accompanied by a reported 0.4% price rise in UK property prices in Dec 2009 by Nationwide and a 2.2% drop recorded by Rightove.

Nationwide´s modest rise is slightly down on the 0.5% rise in November whilst rightmove reported a sharper fall of 2.2% against 1.6% in November.

So, the housing market is either weak or weaking.

The question is, to what were he weak prices supported by buyers pull forward their purchases in order to avoid the stamp duty due from 1st of Jan 2010?

Is this the housing equivalent of the cash for clunkers deal for cars?

The answer is probably not. Yes, the volume of property sales in the lower price brackets (below 250,000 GBP) held up well, but it fell sharply in the higher price brackets where sales volumes were much lower and prices softened rather than firmed (as they did in the lower price groups).

2010 is likely to find that sales volumes in the lower price range will fall and prices will soften as Goverment support is withdrawn and the modest effect of home purchases brought forward takes its effect.

However, the real question we need to ask when forecasting short term property prices (ie upto 1 year) is what will happen to interest rates?

We don´t know, but we do know this about 2010

• Government debt default (perhaps by Greece or Dubai or another hidden gem) is a real possibility that we will live with all year (even if it doesn´t happen)
• UK and US Governments will come under increased pressure to deal with their debt
• The dollar may rise as it is seen as a safe haven, which might mean US interest rates lift
• UK Commercial property refinance needs could derail two major UK banks and create a new banking crisis and forcing UK interest rates higher and derailing UK residential property prices
• UK Tax hikes will not take affect in 2010 but in 2011, thereby putting further downward pressure in UK property towards the end of 2010.

Okay, we can only conclude that the risk for interest rates is an upward move. Essentially, if something really good happens, then interest rates will rise – in both the UK and US , and if something really bad happens, interest rates will rise.

Therefore, low and stable interest rates are dependent on a very stable and low growth economic scenario.

Therefore, the best that might be hoped for is a modest 3 to 4% increase in property prices, but with the equal risk of a fall of 10 to 15%. Albeit, you can expect the wide divergence in property price indexes to continue.

The result is likely to be somewhere in the middle, but the risk for property prices is clearly on the downside.

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…

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!

Latest US data shows the rate of property price rises slowed in September despite the extension of the first time buyer tax credit to the new year.

US Property Prices Sept 09 - Case-Shiller

The slowing growth rate was accompanied by a down grade in US GDP figures as the broader US economy was incorporated into the earlier growth estimates which are largely based on international businesses.

David Blitzer of S&P commented that “the gains in the most recent
month are more modest than during the seasonally strong summer months. Fewer cities saw month to month improvements in September than in August in both seasonally adjusted and unadjusted figures.”

However, these figures mask wide variations with “Las Vegas remaining the most depressed market. Prices have declined for 37 consecutive months, with a
peak-to-trough reading of -55.4%.

“Detroit has seen some positive movement in recent months, [yet] the market is still at only 73% of its 2000 value. This compares to regions such as Los Angeles, New York and Washington, which have maintained values of 70-80% above their 2000 averages, in spite of the market downturn.”

The gap between the successful and unsuccessful locations and regions appears to widening although it is worth noting that Government car giant bail outs has almost certainly prevented Detroit from a property price freefall. However, there is no respite for Las Vegas speculators and the market shows clear signs of a flight to quality.

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…