Print this article
Despite the gloomy forecasts – including ours – 2009 didn't turn out too badly for UK residential property. The Nationwide house-price index rose by 5.9% year-on-year. But the same risks facing the market 12 months ago still remain. If anything, they're worse. The outlook for 2010 and beyond is anything but rosy.
The pick-up wasn't caused by a surge in demand, but a shortage of supply, as widespread selling didn't happen. Much of that was due to the Bank of England cutting its base rate to 0.5%, the lowest ever. With payments on about two-thirds of all mortgages linked to the base rate, that meant much lower loan costs for many and relief for over-extended borrowers. Consequently, repossessions and forced sales have been much lower than expected, while low rates enticed some waiting buyers to take the plunge.
But this prop could soon be kicked away. Even if the Bank of England doesn't decide to hike base rates in the near future, UK mortgage rates are set to rise in the next 12 months. Fears are growing about the scale of Britain's public debt – already at its highest-ever peacetime level. A record £225bn of UK government bonds will need to be sold by the Treasury just to balance the books. Investors will only buy these securities if the returns they receive are high enough to compensate them for the extra risks they're taking.
Already ten-year gilt yields have climbed to 4%, up from their 3% March 2009 lows. This rise will eventually filter through to higher mortgage rates as borrowers compete for cash with the government. This will reverse the benefits borrowers have enjoyed from lower mortgage repayments. Over-extended borrowers will face renewed financial pressure and that's likely to lead to more foreclosures and forced selling in 2010.
The number of first-time buyers has dropped to its lowest point in a decade, says the Halifax. Many have problems raising deposits, while lenders are picky about making loans. Without this group, a sustainable recovery can't happen. In short, the messy resolution of the UK's property problems has only been deferred.
The pundits' views on 2010
"Predicting house prices? It's like herding cats,"says Julian Knight in The Independent. Yet the New Year has seen the usual wide range of views about where values are heading.
Citigroup features among the biggest 2010 property bulls with a 5%-10% forecast rise, while BNP Paribas expects a more modest but still positive upward move. Ray Boulger at Charcol is basing his 4% forecast rise on interest rates staying "very low, while recent surveys show most people expect houses prices to rise moderately in 2010". On the other hand, Knight Frank predicts a 3% overall price dip and Savills sees a near-7% fall. Fitch forecasts a 6%-8% decline, while Mark Dampier at Hargreaves is expecting a 10% drop, as are the long-term property bears at Capital Economics as "fiscal tightening, rising unemployment and slowing – maybe even negative – pay growth weigh heavily on household incomes and buyer confidence, while the shortage of available property will ease".
So what about the fundamentals? Is UK residential property now fairly valued? Here, most bulls would say yes, although some have doubts. Paul Mortimer-Lee of BNP Paribas reckons prices "represent – in the short run – reasonable value". But "the market still looks vulnerable over the longer term – there's more than a hint of Wile E Coyote about current house prices".
Meanwhile, bearish analysts think this remains a bubble that hasn't popped. "It seems there's an endless supply of 'this time it really, really, is different' believers out there," says Danny Gabay at Fathom Consulting. The reality is that British property still looks expensive by historical standards. Peter Dixon of Commerzbank estimates that, "on the basis of the standard price/income multiple, property remains overvalued (it's currently above four versus a long-term average of 3.7)". And prices remain far higher than building costs, says Tim Leunig of the London School of Economics. Finally, on a global basis, Britain remains expensive compared with most of the rest of the world, says The Economist – although it's by no means the worst (see below).
Is there value in property anywhere?
| Most over-valued residential property markets* |
|---|
| Spain |
55% |
| Hong Kong |
53% |
| Australia |
50% |
| France |
40% |
| Sweden |
35% |
| Ireland |
30% |
| Britain |
29% |
| The Netherlands |
21% |
| and the most undervalued |
|---|
| Japan |
33% |
| Germany |
15% |
|
| * on a price/rental basis. Source: The Economist |
One way of gauging whether property is at 'fair value' is by looking at the ratio of house prices to the income they produce, ie, rents. It's like the price/earnings ratio used by stock analysts. So the latest Economist round-up of global house prices and rents has produced more ammunition for UK property bears. Despite falling some 12.5% from their peak, British house prices are still almost 30% overvalued on this basis. Indeed, houses look good value in very few countries around the world, as the table shows. As The Economist says, with the notable exception of Germany, "Europe's housing correction seems far from over".
Published in
Property
| More
articles
by
David Stevenson
Related articles
-
By Merryn Somerset Webb, Mar 15, 2010
-
By John Stepek, Mar 09, 2010
