Property Crumble

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It is called a revision and suggests that the figures we read about in the news are not only out of date by the time we read them, but that what we experience ourselves is a more accurate indicator much of the time.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.

Will Property Prices be Crisp or Soggy in 2010

Economies that were dead on their feet have been brought back to life.

However, it wouldn´t be until 2010 unfolds that we´ll know whether we simply have a zombie like economy or whether there really is a fresh economic start?

2010 is the year in which, even if the UK or US Governments don´t wish it, the markets will require the paying down of Government Debt to begin. It is the year during which government funded projects will be cut back or delayed, reducing spending and bringing the unemployment axe to the public sector.

The public sector in developed European countries is thought to employ directly (or indirectly) at least 50% of the workforce.

For instance, in the UK, around 20% of the workforce are paid directly by the government (ie work in the NHS, Schools or Local Government) but a further 30% work for companies that are dependent on government money (ie government agencies or private businesses that are the recipients of that government money).

The axe is most likely to fall on the private companies working for government – because that is where it can most easily fall. And, fall it will.

Therefore, 2010 will see modest but continuing increases in unemployment in the UK. The savings index is likely to remain strong as people save money to cover the risk of employment, the knowledge of future tax rises due in 2011 and the need or desire to keep paying down debt.

The steady growth of unemployment in the UK and other developed European countries will keep the lid firmly on property price rises.

The best we can hope for is that 2010 is not an exciting year for property, as all exciting property news in 2010 is likely to be bad news.

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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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

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Anyone looking for evidence that current property demand, and therefore prices, are supported by government stimuli need look no further than the US.

Reported in the Economist last week we had

Home re-sales up by 9.4% in September
New home sales dopped unexpectedly

Why? Simply, the resales spike was caused by a rush to complete in time to take advantage of a tax credit that is about to expire.

So, what will happen next month? Almost certainly there will be a sharp fall in re-sales as any sales in the pipeline would have been brought forward to meet the tax credit deadline.

Therefore, next month expect dire new and re-sale house data from the US.

The October results will give us a clear picture of how sharply a market falls once the government induced stimuli disappear.

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.