Property Crumble

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.

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It is called a revision and suggests that the figures we read about in the news are not only out of date by the time we read them, but that what we experience ourselves is a more accurate indicator much of the time.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

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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Latest US jobs data show that 10.2% of the US workforce is now out of work.

This was worse than analysts projections and means that medium term house price forecasts will now be turned slightly further to the negative side as the faster than expected growth in unemployment is factored back into the property price forecasts.

In the UK things look worse with the economy failing to pull out of recession, unemployment continuing to rise and local insolvency practitioners working harder than ever.

Insolvency practitioners are the undertakers of the business world and this year they have been exceptionally busy and in the words of one practitioners are ’seeing a lot of good entrepreneurial businesses go bust’.

This is steadily destroying the ability of the economy to meet demand in the future. In the future it won’t be there and instead we will either have anemic growth or high inflation – and possibly both.

And, such conditions coupled with high and persistent unemployment will drain the property market of buyers and hurt their affordability. This will create a sustained downward pressure on property prices in the UK and US.

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.