Property Crumble

The UK coalition government has made an immediate impact on the UK property market with measures that will quickly weaken UK property prices.

HIPS – Home Information Packs have been suspended with immediate effect – and will, in the words of one estate agent, lead to an increase in properties put up for sale on a speculative basis.

Equally, the threat of capital gains taxes on profits of up to 40 or even 50% has led long term investors to seek a quick sale.

Don’t forget the central London market has been is largely driven by foreign money for the past few years – Russia or Middle East Oil Money plus Euro investors – and now, those same investors need to sell quickly as they too will face 40 to 50% tax on any UK property gains.

Of course, those same non-UK investors will seek to place their investments in alternative, low tax,  locations. And, to this, can be added the UK based investors also heading for the exit before the new rules take effect.

Agents are already reporting a sharp increase in instructions and we can expect the supply of property to rapidly outstrip demand – even in property’s traditionally best selling season – the spring.

And, at some point, the over supply on the market could reach a tipping point which sends UK property prices downwards sharply.

All eyes on the RICS supply figures to be released shortly. We could be in for a far sharper decline in UK property prices than seemed possible only a week ago.

Pretty much as predicted, the supply of property in the UK market has continued to increase according the the latest RICS survey, and no, the expected buyers have not materialised.

On an anecdotal level, I counted 21 For Sale boards – many of them new – on my way into work this morning and only 1 Sold sign (and that was sold before Christmas anyway).

Latest mortgage figures show that there has been no significant increase in lending – so, not surprisingly, buyers are not able to bid up prices and the property chains are collapsing.

We’ll provide more analysis shortly on the latest supply figures, but April is traditionally the best month for UK property sales and hence a weak April bodes for further price falls during 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?

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.

Commercial Property Time Bomb?

The affect of the commercial property sector – which is linked to the health of companies using warehousing, offices or retail space – on the residential property sector should be negligible.

Sadly, this decoupled effect isn’t going to work in this property recession.

Here’s why:

Residential property values are closely linked to the ability and willingness of banks to lend or issue residential property mortgages (okay, also known as home buyer mortgages).

The growth in prices in the US and UK and other developed western European economies since 2004 has largely been a result of increased credit and not fundamental shifts in demand or capacity to purchase.

Therefore, the role of finance in determining property prices has grown significantly in the past 5 years such that what affects the banks now directly and significantly affects the availability and price of residential mortgages and therefore house prices.

Remember that at the peak in 2007,

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Rob Perrins Managing Director of Berkeley Group

Whilst the property market indicies tell us that property prices have risen slightly over the past couple of months, the latest results from Berkeley Group PLC paint a different picture.

Rob Perrins, Managing Director, said

The value of sales are well ahead of 2008 and approximately 40% below historic averages over the past six years.”

and

Transactions fell from 968 to 914 units and average sales prices have fallen from £399,000 to £299,00

and

we have seen “positive signs from equity rich customers, particularly from overseas who have the additional benefit of the depreciation of Sterling

So, what are we to make of this?

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