May 13, 2008 | posted by Michael Baxter in House prices | comments (0) |

House prices are down again, and this time across the length and breadth of the UK. In fact so widespread are the falls in house prices, that the Royal Institution of Chartered Surveyors (RICS) headline index, which tracks what estate agents are saying across the country, fell to a stunning  minus 95.1. This means that, after seasonal adjustment, the difference between the number of estate agents who said house prices were up and those who said they were down was negative 95 per cent. The index has never been so low, not since it was first begun in 1978.

Yet, while agents are almost unanimous on price falls, RICS went to some pains to point out that this does not suggest prices are falling especially fast.

The index “is, crucially, a measure of breadth rather than depth and thus says little about the extent of the actual decline in house prices,” says RICS.

It all boils down to which one falls the fastest, demand or supply.

Sure, demand is low, but if supply is even lower then you would expect prices to go up.

RICS says that, actually, in April, the number of houses for sale on estate agents books fell, as they did in March, and are now at their lowest level since January. It also said that new instructions to sell property declined last month for the tenth month in the last eleven.

The trouble is that while fewer properties are coming on the market, fewer are being bought too. In fact, despite the fall in the number of properties for sale in April, the ratio of completed sales over the last three months compared to the stock of unsold property on the market also fell.

The ratio is now 21.1 per cent, compared to 24.6 per cent last month – RICS says “market conditions remain the loosest since September 1996.”

In fact, it says that surveyors now have an average of 86.6 properties for sale, compared to 90.2 in March, but sales during the quarter to April were just 18.3, compared to 22.2 in the three months to March.

And it is this low supply that gives RICS a hint a of a bullish note. RICS spokesperson Ian Perry said: “Although most surveyors are now seeing price declines, the extent of the fall is, at this stage, quite modest.”

“The real issue,” he said, “is the collapse in the number of housing transactions. This has very real implications, not just for the property industry but also the High Street and the wider economy.”

RICS then warned that the fall in the number of transactions will hit “sellers of white goods.”

But, it said, “the continued absence of distress sales,” was keeping supply low.

What then will the future bring? The RICS index for tracking expected prices fell to the lowest level it has yet recorded, but the real interest must lie with what happens beyond that.

It seems that, in part, the housing market is being saved by its previous strength. Most property owners have so much spare equity that they can afford to stay put. Buy-to-let investors might not be buying, but neither, or so it appears, are they selling.

Recently, housebuilder Persimmon said it had put its plans for building new homes on hold.

But don’t forget this: the cost of building properties is much cheaper than the prices they are sold for, it is the cost of land that is digging into margins. One assumes that if the market stays at current levels, or continues to fall, then the price of land will fall, probably quite dramatically, until it becomes profitable to build again; this will push up supply.

Then there is the issue of what happens when people have to move. If they have to move because they can’t afford to pay the mortgage then clearly this will lead to a rise in supply.

But supposing they have to move because they have changed jobs or their family has grown in size?

There are two possible scenarios:

Scenario 1: since the total value of housing stock is around three times the level of mortgage debt, it is possible that many in this position could increase the size of the mortgage on their existing home, and easily be able to repay the mortgage through renting it out. The equity they have thus freed up will be available as a deposit on the new home.

Scenario 2: equity is not sufficient for them to do this, or they simply don’t want the risk of becoming a property investor, and have to sell.

It seems that the longer the market remains soft, and the further prices fall, the more likely we will see scenario 2.

We all know the cost of living is rising, every tabloid is telling us that. We all know credit is hard to obtain. The longer this lasts, the more likely it is that more and more houses will be sold.

A recent report in the FT found that if house prices were to fall by 15 per cent, that would leave just 0.5 million people with negative equity. However, if prices fall by more than 20 per cent, then the number in negative equity rises rapidly. A 20 per cent fall would mean 1.2 million with negative equity; a 25 per cent fall, 1.8 million; and a 30 per cent fall, 2.5 million.

Whether 2009 will see a crash in property houses is in the balance. It depends on what happens this year. But we will say this, the more house prices fall, the more likely it is they will then fall even further.

March 11, 2008 | posted by Michael Baxter in House prices | comments (0) |

Yesterday, one of the phrases that was most popular was the one that said, ”It’s time to stop the pretence – the US is in recession.”  Today, it is tempting to say something similar about the UK housing market.   You know, of course, that property market bulls will somehow find reason to talk up prices, but the latest piece of news from the Royal Institution of Chartered Surveyors (RICS) really does seem to be dire.  Is it curtains for the UK property market?

You will recall we have always been fond of the RICS index.   Every month it asks surveyors if prices are up or down in their region. It takes the percentage number who say up, subtracts the percentage number who say down, and the balance forms the RICS headline index. It also asks a number of other  key questions, which together form the monthly RICS survey.

The headline index is down again – this time to -64.1.  It’s been lower than that before – but only just. The all-time low recorded by RICS for this index was -64.5, seen in June 1990.    And we all know what happened to house prices in 1990 and the following year.

The RICS index has now been in negative territory for 7 months, actually it suffered 15 months of negative scores between the summer of 2004 and autumn 2005 – and yet the housing market slowdown proved  something of a trivial breeze, with house price falls revealed by the likes of Nationwide, Halifax and Hometrack never proving to be significant.    So, it could be argued it is too early to tell what the ramifications are for the recent slide in the RICS index. 

But there are a number of crucial differences.  For one thing, of course, is the severity of the fall in the RICS index.  But look at little deeper at its report, and then woe seems even worse.

But first, squint, and view the data from a certain angle, and you can detect some good news. The RICS index for expected prices did actually rise slightly from last month – but then again only by a smidgen, and last month this index fell to its all-time low. 

More significantly, sales expectations turned positive for the first time since last June, so surveyors expect sales to rise.      

What matters though is whether sales are greater than the number of new properties coming on the market.   This brings us to the really damning piece of news.

The stock of unsold property on surveyors’ books jumped by 8.5 per cent  on the month, and by 48.6 per cent  on the year, the highest annual growth rate since December 1989. Average stocks on surveyors’ books were 92.0 in February (the highest since October 1998), compared to 84.7 in January.

Even more tellingly, the ratio of completed sales (over the last three months) compared to stock of unsold property on the market fell to 26.5 per cent  in February, from 28.7 per cent  in January. Market conditions are now the loosest since September 1996, and the sales to stock ratio is more than 10 percentage points below the survey’s long-run average.

Actually, we do find this a tad confusing.  Because last week, the Halifax suggested that stock to sales ratios in the UK were actually quite good – especially in comparison to the US, where the stock of existing homes  is now sufficient to meet 10.3  months of demand.  It seems to us that  a ratio of 26.5 percent for properties sold over the last three months, to total stock – is actually not dissimilar to the US stock levels – in fact it is the equivalent of over 11 months of supply, so we are not sure where that optimism came from.

Bear in mind that while the figures announced by RICS yesterday seem bad, the credit crunch has not really hit home yet.   There are still over 1 million people to come off fixed rate mortgages this year, and the effect of the recent changes in the size of deposits required by lenders will not have shown up in the figures yet.

For some time we have felt 2009 will be the nasty year for the UK – so watch the unfolding story of the RICS index. It will be a telling tale.

January 16, 2008 | posted by Michael Baxter in House prices | comments (0) |

Every month, the Royal Institution of Chartered Surveyors (RICS) asks its members whether house prices were up or down in their neck of the woods. It takes the percentage number who said up, subtracts from this the percentage number who said down, and voila, out the other end comes the RICS index.

And as we have said many times before, it has proven to be a good omen for signposting the way forward. In the past when it has fallen, other indices, from the Nationwide and Halifax, for example, have fallen in the months after. When, in the spring of 2005 it surprised everyone when it started to improve, other indices did indeed confirm a recovery, but only months later.

Yesterday the RICS index fell to the lowest level in 15 years. In fact, the index fell to minus 49.1. That’s the lowest level since November 1992.

RICS also recorded a rise in new instructions to sell properties, and the number of unsold properties on estate agents’ books rose by 7.1 per cent in November, from 9.1 per cent the month before.

The bad news pile got even higher, with the news that RICS has also recorded that the index for measuring the percentage who expect house prices to fall over the next few months rose to minus 62, that’s the lowest level since RICS has been tracking this data, which was in 1998.

So it all seems pretty grim then.

But here is the puzzle. Apparently it’s not as bad as it seems. Ian Perry, a RICS spokesman, said: “While sentiment seems to have reached its lowest ebb, the underlying economic conditions are vastly different to what the country experienced in the early 1990s…Supply would have to loosen considerably before prices experience a significant dip,” he said.

The FT had Simon Rubinsohn, chief economist at RICS, saying the slowing pace of decline in new-buyer enquiries had been even looser in 2005 without prices falling on an annual basis.

Now, before we say what we think, and by the way, you’d better get the swearbox ready, because it won’t be pretty, here’s a caveat.

Thirty months ago, when RICS said the market was set to pick up, we were somewhat incredulous, but our cynicism was proven to be wrong.

But this time around, it is hard to say anything other than this: in its optimism, RICS might be striking a charming note, but it’s the wrong note, it jars with reason.

At the moment, the comparison with 2004/2005 is unclear. During the last decline, the RICS index fell for four months in succession before it posted a one-month pick up, followed by a few months of the index running along the bottom. This time around, it has fallen for five months in a row. So we will have to wait and see what news next month brings before we can start drawing conclusions.

But, with house prices still completely unaffordable for most would-be first time buyers, with buy-to-let investing looking decidedly high risk, it is difficult to envisage a pick up like the one we saw in 2005.

RICS says that falling interest rates will make it more attractive to buy properties again, but isn’t that missing the point. Interest rates are falling because things are dire. In any case, wage inflation remains lower than High Street inflation measured by the Retail Price Index. The cost of petrol is going though the roof, utility bills are expected to rise, 1.2 million people are set to come off fixed-rate mortgages, and some of them, at least, will hit the brick wall that is the credit crunch.

December 19, 2007 | posted by Michael Baxter in House prices | comments (0) |

It’s only Tuesday, and already this week has seen three pieces of bad news relating to house pices.

First off the blocks was Rightmove. The property web site, that claims to list 90 per cent of all homes for sales in the UK, says that asking prices dropped 3.2 per cent in November. London suffered a 6.8 per cent drop. Rightmove says part of the fall was down to HIPS, with property owners trying to sell their homes before the December 14 deadline for introducing HIPS for all homes.

But then Rightmove reckons the HIPS-effect only accounted for around a third of the overall fall.

Then the Bank of England dished out some worrying news. In a survey of 2,000 people it found that around 22 per cent have experienced difficulties when their fixed rate mortgage came to an end.

The Bank of E is dressing this up as good news, saying the majority of people will not have difficulties when their fixed rate mortgage comes to an end. But remember, next year there be 1.4 million such deals ending, at a time of much tougher credit conditions. If 22 per cent have difficulties as a result, that’s more than 300,000. Could the UK cope with 300,000 people suddenly struggling to repay debt?

Finally, there was the Royal Institute of Chartered Surveyors. It reported a slow-down in the demand for rental properties from tenants.

But the really interesting bit of news comes in the shape of this quote from Jeremy Leaf, a spokesmen for RICS. He said, “A combination of tightening lending criteria and successive interest rate rises has started to hit the buy-to-let market but with the drop in capital gains tax due in April, many landlords are resisting selling until spring”.

In short, buy-to-let investors will wait until next April before they start selling - making use of the new capital gains tax rules.

It seems that the property market has until then to sort itself out. But if conditions are still tough then, that could spark mass selling from the buy-to-let brigade.