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UK Housing Bear Market Confirmed

Housing-Market / UK Housing Jan 29, 2008 - 01:20 AM GMT

By: Nadeem_Walayat

Housing-Market Best Financial Markets Analysis ArticleUK house prices slumped in the quarter to December 07, with London leading the way as momentum gathers towards the 2 year forecast for an average decline of 15% by August 2009. The mortgage banking sector is only just beginning to feel the impact of the housing slump as the number of foreclosures (repossessions) is expected to surge to a record busting 80,000 for 2008 from 40,000 last year. Northern Rock was the first to go bust, other banks will follow. But in the meantime watch out for other mortgage lenders, especially those exposed to the buy to let sector such as Paragon to be pushed towards bankruptcy, down 90% from its highs.


The Big Freeze continues to tighten on the UK commercial property market with Britain's fourth biggest insurer, Friends Provident freezing its Property Fund in December and thereby denying over 110,000 investors the ability to liquidate their investments. The unfolding crash in the commercial real estate market may be the biggest in 27 years as valuations are cut on holdings of the UK's £700 billion commercial property market. As highlighted periodically over the last 6 months, funds running short of cash in the wake of investor redemptions will be forced to sell properties and thereby drive down commercial property values in an ever increasing downward spiral. Many funds are following Friends Provident by freezing funds or implementing withdrawal restrictions.

The buy to let sector crashette is expected to coincide with Governments Capital Gains tax changes that come in force in April 08 which cut the tax rate from 40% to 18%. Typical buy to lets produce yields of between 3% and 5% of their current value, and therefore now present a poor investment and incentive to cash in especially in the light of the trend of several months of declining prices.

UK Housing market has tipped over the edge and set to track the 2 year forecast trend towards a 15% drop in nominal terms, and in real terms the decline would equate to more than 20% on the RPI measure.

Properties At Auction Jan 07 April 07 June 07 Nov 07 Dec 07
% of properties Sold
79%
66%
65%
49%
40%
% remaining unsold (failing to achieve reserves)
3%
23%
23%
27%
24%
% Sold prior to auction
11%
4%
0%
17%
12%
% Sold afterwards
0%
4%
6%
4%
12%
% Withdrawn Prior to Auction
8%
4%
6%
2%
12%
% of Total available properties Sold at auction (excluding withdrawals)
97%
76%
76%
71%
64%

 

Distressed sellers seeking the auction route to liquidate in a hurry may find that they have missed the boat in terms of the capacity of the market to meet seller price expectations. The number of properties sold at auction continues to slump from 97% of those bid upon in January 2007, to under 64% at the December Auction at a typical northern auction room.

The Market Oracle affordability index peaked just prior to the start of the decline in UK House Prices. The trend forecast is for a major retracement from extreme levels for the duration of the 2 year forecast to August 2009. Home owners in the UK are being squeezed by inflationary price rises well beyond the official rate of inflation upon which pay deals are based. Already the Public sector has started organising against the UK governments proposed 3 year pay deals in an attempt to bring future inflation under control.

For nearly a decade the mantra has been to get onto the property ladder as renting has been viewed as lost money. However on analysis of the actual costs and benefits suggests that House prices need to rise by more than 2% per annum to match renting over buying. Whereas a decline in house prices of just 2% per annum would result in a home owner being £48,000 worse off against renting. on an average £200k property.

Interest rates have clearly peaked with the current rate represented by the 3 month LIBOR falling from an extreme of 6.7% to 5.5%. However this drop is not a function of the easing of the interbank credit crunch but rather as a consequence of central bank action starting 19th December 07 to flood the money markets with cheap money. Therefore the reduction in interest rates is not expected to have the desired impact on the mortgage sector as banks have tightened lending criteria in the face of growing losses and prospects of an an accelerating number of loan defaults going forward.

UK interest rates are on track towards hitting the Sept 08 target of 4.75%, by which time the following 12 month trend will become apparent. The next rate cut is scheduled to occur at the February 7th MPC meeting, that is expected to take UK interest rates down by 0.25% to 5.25%.

Conclusion - The UK Housing market has confirmed its downtrend and is on track towards an average decline of 15% by August 2009. The impact of declining house prices has yet to bite the economy with a crashette scheduled in the quarter April to June 08 during which time we may see a plethora of headlines 'UK House Prices Crash'.

By Nadeem Walayat

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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