Knowing – or maybe believing is a better word – that property markets and economies around the world are on the way back up sure is a nice feeling. It may be a short-lived feeling, because according to some there are signs that the short-lived positivity will end as quickly as it begun.
I am not one of the people. Nor am I one of the plastic fantastic optimists that think the only way is up, and that rejoices in reports of UK mortgages doubling, and property in some areas selling for almost the same as it would have at the height of the boom.
The truth is, yes, we are making some headway against the deluge of negative financial news. In fact, a good analogy of the current recession recovery process for me, is a snow plough that has been completely submerged in snow: we have just jumped in and managed to get the engine started, the heat is slowly melting the snow, but we still have a hell of a lot of pushing to do before we clear the drifts.
As you would expect, all the countries of the world are recovering in different ways and at a different pace, depending on the makeup of their economy and the funding and direction of its government’s economic stimulation policies. Nobody knows how strong the recoveries are without the massive injection of cash and stimulation being poured into the world’s markets.
In this series of articles we will profile the G8 nations to track the progress of recovery in their housing markets so far, and attempt to map any possible deep-drifts in the road of stimulus withdrawal ahead.
Part II: United Kingdom
Well, if you take the figures at face value the UK housing market has seen one of the strongest and fastest rebounds in the world; with prices having grown 8.9% since their February trough according to Nationwide. The 5.9% growth for 2009 recorded by Nationwide is incredible compared to the 12% drop seen in 2008 that had economists and analysts forecasting a 20% drop for 2009. And Halifax is likely to show an even bigger growth.
However, if you look at the recovery in detail you can see that the floor the growth rests on is made of cardboard:
At the tail end of 2008 the government realised that what the UK housing market was in was a crisis with the potential to reach catastrophic proportions, and they began launching incentives to make people buy. Interest rates being slashed to 0.5% and the threshold for stamp duty being raised from £125k to £175k were the main ones, but there was also things like Homebuy direct offering government subsidised loans.
All this finally started to have an effect on demand, which began to increase very slowly. So slowly, that, on its own it would have had little or no effect on the downward flow of prices. However, the marginal increases in demand was met with a rapid contraction of supply as people decided to rent rather than sell in a down market, thousands of people lost the ability to sell when they fell into negative equity because of the price drops, and thousands more couldn’t sell for enough to buy another property.
The government’s efforts also led to job losses and repossessions slowing, as more people stayed on with pay-cut’s etc.
The combination of the two; rising demand and contracting supply started to put upward pressure on prices in March/April.
Ever since that point impartial economists and analysts have been wondering when the rises would stop and the falls restart; when rising unemployment would either scupper the rising demand, tip the supply balance or both, and/or when the positive data would lead to more people selling their house either through choice or because the negative equity noose has been lifted.
To those people it is a miracle that it last as long as it did, and 8.9% is completely crazy given that unemployment is still rising, and the UK is one of the only economies in Europe still seeing its GDP contracting in the third quarter, not to mention that a deposit of 40% is still required to secure a mortgage at a decent cost.
That said: the rate of growth has been slowing, from the monthly growths of over 1% and even over 2% during the summer, to well below 1% in the past few months; 0.4% in December, and 2010 is shaping up to put even more pressure on the housing market recovery. Here are some of the things that could damage the recovery as we progress into the new year:
- The stamp duty holiday ended January 1st. Anybody buying a property for more than £125,000 will now have to find an additional 1% of the price to pay as stamp duty.
- The massive stimulus injected into the economy in 2008 will start being paid for in 2010. This will mean massive job losses in the public sector, which could lead to more repossessions, increasing the supply and possibly decreasing demand.
- A slew of tax changes in 2010 were also revealed in the pre-budget report, these will cause many people to adopt a wait and see attitude before buying property; wait and see how the tax changes affect them. This will undoubtedly reduce demand, though to be fair it will likely have the same effect on supply.
During the last crash, prices fell by 20% before flattening and staying flat for almost 6 years. It is a safe bet that the people who are forecasting a flat year in 2010 are going to be proven right. However, some are also pointing out that the last crash never had the major increase we saw last year. They are cautioning that said increase will have to be cancelled out with a matching decrease, before the market levels for a prolonged stagnation.
Of course nobody can really tell the future, but in the case of the UK housing market, it sure will be interesting to watch.
This article written by Liam Bailey of Property-Abroad.com