Property Crumble

property price losses in 2011

To date, the average property owner has lost just under £1,900 on his property since Jan 2011.

 

This chart shows the impact of slow property prices coupled with sharply rising inflation. This analysis also assumes a 1% per year maintenance cost. Clearly, for apartments and large detached houses, this cost will often be higher and therefore the losses will be greater.

This analysis is based on an average property value of £162,000.

Therefore, for London based property, where the average price is around double the UK average value, then the losses per average London property will be closer to £3,800.

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.

The property price gloom mongers are among us.

The nights are drawing in and the hoped for (hoped for? who ever beleived this?) pick up in US and UK housing markets in the Autumn failed to materialise.

Earlier this month, the UK’s Halifax reported monthly falls of 3% in average property values – a huge decline. Whilst fellow mortgage lender and property price index tracker, Nationwide, reported just 0.1%.

In mid/late October bank stocks began their 3rd quarter reporting season – profits sharply down, concerns over the mortgage book and stock prices taking a hit.

Now then, does this put us in place for a 30% decline in property prices? Should forecasts for 2011 of a 30% property price drop be believed?

No.

It’s not that bad.

Don’t forget that the central banks – US Fed, UK Bank of England and Euro Central bank – have all been withdrawing from their various forms of printing money (know as quantitive easing in some cases or special liquidity rules etc…).

Read more…

As regular readers of this property price blog will know, we closely follow the supply and demand in UK property to see where property and house prices might head in 2010 and what we might forecast for 2011 property prices.

So the latest news that the South East of England’s property market has capitulated is important news for 2011 forecasts.

Essentially, for most of 2010 the UK has run two property markets London and the South East plus the rest of the UK.

London and the South East have had relatively healthy property markets and London surveyors report a stock of around 30 against a national average of 67 and levels above 90 in the North West, Yorkshire – Humberside and West Midlands regions (Wales has over 140).

The South East – until June – had been performing very closely to the London model – very low stock, steady sales and steady price rises since 2009, but in June we see the first signs of capitulation in the latest data from RICS (published mid July 2010).

In this new data we see the number of buyer enquires falling, stock levels rising rapidly and most concerning of all, the number of completed sales collapsing towards a low not reached since march 2009 when property prices fell 25%.

London too is showing a slow down in sales and enquiries but its stock levels are so low, at 30, that things need to get  a lot worse before we’ll see significant price falls in the capital.

However, now that the South East’s performance is mirroring that of the rest of the country we can expect to see the countrywide averages turn negative and as that does, so will people’s expections.

Surveyors are already reporting that the Euro crisis, followed by the emergency budget followed by the World Cup have already dented confidence and it seems that those responses are now showing up in the early data.

At the same time, economic forecasters are now polishing off their worst case scenario property price forcasts for 2011 with predictions of a 30% fall in prices becoming the norm (latest from National Institute of Economic and Social Research).

Will this happen? Well, not in London for sure.

The most likely national average property price fall will be around 10% to 15% by April 2011. However, that will mask two things.

Firstly, London will fall perhaps 5% to 10% and other parts of the UK will fall more dramatically – perhaps 15 to 25% and these regions, in order of risk, would be

1. Wales
2. Yorkshire & Humberside
3. West Midlands
4. North West 
5. East Anglia

Secondly, the only properties currently selling are prime properties – ie. those that have a better aspect or larger garden or better condition than the average. The rest of the housing stock of average or ordinary houses that normally sell during a boom period aren’t shifting at all.

So, the more modest falls in headline prices mask that fact that only superior properties are selling and the massive regional variations.

Now, equally, the falls might be delayed or sped up depending on when the first rise in interest rates is applied by the Bank of England,  but nevertheless, in nearly all cases, with perhaps the exception of those parts of the London market which are driven by global economic performance, the value of a property at the end of 2011 will be at or below the value of the same property in 2004.

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.

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.

UK Property Prices - Slowly Sliding?

Nationwide’s index reported a modest increase in UK property prices in the February to March 2010 period.

At the same time, the US Schiller index reported weak US property prices amid growing consumer confidence.

The UK’s chancellor also announce an attempt to reflate the UK property bubble by suspending stamp duty for first time buyers on properties up to £250,000.

So what is happening?

Firstly, property prices are not collapsing or falling significantly (as per the index) however, the  number of mortgage approvals is still very low and there are clear suggestions that only the ‘best in the road’ properties are selling with all other less attractive options unable to obtain a buyer.

This flight to quality means that the indices will in effect compare the prices of the weaker properties (which sold in a strong market) with the stronger properties which are still selling in a weak market (unlike their weaker cousins).

What do we mean by weak property?

Well, simply properties that need work doing to them – or lack basics such as double glazing or where the wiring is a bit old, or it may simply by that the stronger properties are being sold with display furniture from the developer and so forth.

All of these subtleties are lost by the indices and explain why the indices don’t drop as much as it feels they ought to in a weak market. Or, why the indices don’t manage to reflect the real experience of property buyers and sellers.

Secondly, the US is reporting, at the end of march, more positive news on consumer confidence with an expecting increase in employment – however, the US property price forecasts remain on the slightly negative side.

This suggests that we could see growing consumer confidence coupled with stagnant or weak house prices. And, if the much anticipated inflationary pressures get stoked in either the UK or US, then house prices will fall in real terms.

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.

Halifax Property Price Index comes out on top

We now have the two main indices – Nationwide and Halifax – giving the same readings – and that is of on-going weakness in the UK property markets.

There was a thought that given the diverging results of these two indices in January, that they must be measuring different sectors of the market.

However, now that are both delivering the same results, we can reasonably assume that the difference was the sample period – and that the UK property prices turned negative around the end of December 2009 / beginning of January 2010.

Equally, the property price falls are now in line with the economic fundamentals of weak employment, negative growth in disposable income and weak mortgage availability.

So, will property price pick up in the Spring? This is unlikely, not least because elections add to the feeling of uncertainty and won’t help chains of buyers and sellers to have the confidence to complete.

Nevertheless, in these recent results the Halifax index has shown that it is more up-to-date, as it reported the Dec / Jan price fall at the beginning of February, whilst Nationwide didn’t report a fall until the end of February.

So, to see if there is any change of direction in spring property prices, we need to follow the Halifax index.

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.