The UK Property Crash - Has it been avoided, or just delayed ?(This was written to be posted on Property Tribes - but I thought it belonged here too):
This question came up on another thread, and I thought this discussion deserved a place of its own. People may want to look back this thread in the months to come, and see how accurate my forecasts have proven to be. I offer no guarantees, but I can tell you that I have seen the type of correction that I describe in many markets. So I will say I have a strong expectation that we will see a second and BIGGER leg down in the UK, and a second and maybe smaller leg down in US real estate. The price drop we saw in 2007-2009 has not been sufficient to complete the job of correcting the huge price excesses that we have seen in both property markets.
The thread was inspired by a comment from PT's Nick Parkin:"Not enough credit was given to Brown & Darling for avoiding the crash, but some of us believe that the new government will now remove the support, and that reality is inevitable."AVOIDING a crash?
I think he must mean: DELAYING the crash.
The over-valuation continues. A crash is baked in the cake, it just hasn't been eaten yet.
By delaying the pain, Brown and Darling did the country a huge disservice, IMHO. They have made the eventual pain much worse. More debt has been piled on-top of debt. More people have been tricked into making malinvestments in property and other areas. Therefore, the losses when they come will be larger, and the required bank bailouts will be greater. The time for a genuine recovery in the economy has been pushed back by years.
The best thing would have been if the interest rate cut made in August 2005 had never happened. At that point, the UK property cycle looked set to roll over - just as the US residential real estate market rolled over a few months later in mid-2006. And had the UK market been allowed to correct then, it would have been accompanied with less pain, and much less damage to the overall economy and to the UK banking system.
My forecasting record is not perfect. In the second half of 2005, I missed the fact that the market would be saved, at that critical juncture. ( You can read more about how I have forecast the market over the last few years in my property diary*.) But Fred Harrison got it right. He said the market would have one last hurrah, and move into a two year period that he calls the "Winner Curse" period. It is part of his 18 year cycle. The "Winner Curse" is when people buy at high prices and feel like winners, but ultimately they wind up lumbered with losses. As far back as 2000, he foresaw a peak in 2008 (which ultimately came around Q4-2007) to be followed by a downturn which he expected to last for 3-5 years.
If you want to hear how crazy things still were in June 2007, listen to this podcast of Frisby's Bulls and Bears:
UK Housing; Moon-bound or Pear-shaped : http://commoditywatc...or-pear-shaped/
John Wriglesworth was talking about UK banks lending 6-7 times incomes. We nearly got there, but not quite. The market soon turned down, peaking within the next quarter, and property began a serious correction - the biggest in many years.
For Harrison, the ideal next bottom would have been: 2012-13. In 2006 or so, he even wrote a book about the coming crash, which he entitled, "Boom Bust: House Prices and the Great Depression of 2010." That's the time frame we are in now: and if Harrsion is right we should expect a deep correction in property, not the modest 20% drop we saw already.
The painful corrective period has been stretched out by Brown/Darling's recklessness. Low rates have brought a nice 12-18 months Dead Cat bounce. The H&N property index, which is the average of Halifax and Nationwide fell 20% from its August 2007 to make a low in February 2009, just a few weeks after rates were cut dramatically. Eventually, ultra-low rates put a floor on the market. For many who had sufficient deposits, it suddenly became cheaper to buy and pay a cheap mortgage, rather than going on renting. And hard-stretched landlords, saw their interest rates drop, and this cash flow savings took the pressure off, and allowed them to hold onto their portfolios. But the relief will not be permanent.
Ultra-low rates triggered a nice bounce which lasted over a year, and allowed the average UK property to recoup about half of the value that it had lost. But even with low rates continuing, the upwards momentum has been lost. The property market is running out of cash-rich buyers, and the economics for BTL investors is about to be undermined by the removal of some of the excessively-large taxpayer-financed housing benefits. With that, rents could stop rising this year, and begin a fresh descent in 2011, as rental subsidies are capped or cut.
The mid-correction bounce that we have just seen, is part of the normal cycle. A brief upwards rally is common within the 3-5 years correction. In fact, to show how common the mid-correction rally is, we have also seen a bounce in the US. And now, the US has resumed its slide too after the buyers tax credit was ended just a few months ago.
If you haven't see this chart before, I recommend you study it closely:
Here's the data that goes with the cycle:
==== : H&N index------------ : Rightmove-UK ----- : R-Gr.London--------- :
Peak : Aug 2007 : 192,490 : May 2008: 242,500 : Nov 2007 : 412,731 :
Low1 : Feb 2007: 153,477 : Jan 2009 : 213,570 : Aug 2008 : 379,162 :
Drop : ====== : - 20.3 % : ======= :- 11.9 % : ======= : - 8.1 % :
DCat : Apr 2010 : 169,287 : May 2010 : 237,134 : Jun 2010 : 429,597 :
Drop : ====== : +10.3 % : ======= :+11.0 % : ======= : +13.3% :
Now : Sep 2010 : 165,198 : Sep 2010 : 229,767 : Sep 2010 : 399,019 :
Chg. : ======= : - 2.4% : ======= :: - 3.1 % : ======= :: - 7.1% :
I have reservations about using the Rightmove data, since I think it includes various distortions. But I decided to include it because it does show that Greater London prices did hold up far better than UK-wide prices during the first leg down in the property correction. Using the H&N index, UK house prices fell -20.3% before regaining about half of that drop. Meantime, Rightmove says that Greater London property dipped only -8.1% in a few months, and then gained back the full loss and then some. Rightmove's June 2010 high for GL of 429,597 was actually 4.1% above the November 2007 high of 412,731. Although London shrugged off that initial drop, it is not invulnerable, as some would have you believe. London will be hit hard by job losses in the public sector, and by the cap on Housing benefits. And if banks slide into a second crisis, there will be big job losses in the City also.
My own cyclical analysis is that the Dead Cat bounce (or "bear market rally") is now over, and the second leg down has begun. All three of the indices that I have summarised above showed peaks in the first half of 2010. The huge -3.6% drop reported in the Halifax index for September, has also been followed by a -1.4% drop for Nationwide in October, with a big slowdown reported in Hometracks numbers as well in recent months. Some will say that Rightmove's report of a big jump up in their October figures is a counter-indicator, but if you look closely, you will see that it is merely a rising in asking prices. This is a seasonal thing that happens every year, as vendors "try out" high prices on the market in the fall. I expect it to be retraced very quickly.
A very useful bellwether for UK property prices is the share prices of the major UK homebuilders. Another is mortgage approvals. Both of these are near record low levels. The builder share prices, I follow closely, especially the prices of Barratt Development (BDEV) and Persimmon (PSN.) Both share prices peaked in September 2009, months ahead of the spring 2010 top in the property indices. A lead of 6 months or so is normal. And now both stocks have slid down to new lows, or very near the low of the year in teh case of PSN. For instance, BDEV closed last Friday at 78p, after beginning the year at over 120p, after having twice spiked up to near 140p.
Barratt Development (BDEV) .. update
A key signal that I look for is when prices crossover the 252d./1 year moving average. The last "sell signal" calculated in this way occurred in Feb./March 2010, just before the H&N-index peaked.
Many who are new to using the builders as a bellwether, think backwards - that the share prices are driven by earnings announcements, and that they should therefore lag property prices. But that is not the case. In fact, like property-buying itself, builder share prices reflect sentiment towards the sector. And upwards share movements are most positive when good feelings about property is most intense. They work as a good barometer of how people are feeling. And they are up-to-date and immediate, unlike the property indices which are reported after lags of weeks or months, depending on the index. So fresh lows for the year (in both BDEV and PSN) tell us that today's sentiment is very negative, and the property indices when they are reported in a few weeks time are likely to show that price falls have continued.
From here, I expect a slide of at least 2-3 years. And during that period, I would expect prices to fall at "crash cruise speed" with monthly price falls averaging 0.5% - 1.0% per month, and perhaps more than that. 30 months of falls, averaging 0.8% per month, would be a drop of about 24%. And that would not surprise me. If interest rates push upwards, the drop could be more than that, and the fall could last longer than 2-3 years.
If Barratt or Persimmon shows a sharp rise during that period, then I would consider changing my forecast, But unless or until that happens, I think we could see a bigger second leg down in UK property than the 20% drop we saw in the first leg. And this time, I do not think that Greater London will be able to shrug off the falls.
Keep an eye out for postings in my Property Diary. If I see something dramatically new emerging, I will write about it there.
DrBubb - 1 Nov. 2010
*DrBubb's Property Diary: http://tinyurl.com/GPC-Diary
UK Property Data :: http://tinyurl.com/UKtrap
PT Clone thread.. :: http://propertytribe...avoided-or-just