The Economy in 2009 for the Property Investor: Quarter 4

October 2009

• Bank Base Rate (BBR): 0.50%
• Consumer Price Index (CPI): 1.50%
• Retail Price Index (RPI): -0.8%

Homeowners continued to receive optimistic news that house prices were up for another month (albeit marginally).  However, as pointed out by Martin Gahbauer from Nationwide, several indices pointed to slowing growth rates:  “I would not say the market is particularly healthy, but at the beginning of the year there were few economists predicting house prices would be at this level by October.   The overall number of transactions is still low, however, and prices are still vulnerable to increases in supply.”  Howard Archer, Chief Economist at IHS Global Insight, also warned that homeowners could be in for a tough 2010, with prices expected to fall:  “While the Nationwide data indicates that house prices are still on an upward track from their February low, October’s significantly reduced month-on-month increase fuels our suspicion that the recent rally in house prices is unsustainable and will fizzle out before long.  We believe house prices will be at least 5 per cent lower at the end of 2010 compared to now, and the slippage could very well be greater still.”  Other news reported that mortgage lender GMAC were fined £2.8 million by the FSA for levying unfair charges on borrowers in arrears.

UK mortgage approvals climbed to their highest level in 1 ½ years.  Yet, there was an increase in the amount of compulsory liquidations and creditors’ voluntary liquidations by 14.6% in quarter 3 of 2009 when comparing the same period the year before.  In the same quarter, there was an increase of 9.3% on the same period in 2008 of receiverships (410), administrations (974) and company voluntary arrangements (194).  The Insolvency Service reported there were 35,242 individual solvencies in England and Wales (equivalent to 1 every 3.72 minutes) in the third quarter on a seasonally adjusted basis.  This was an increase of 6.6% on quarter 2 and a 28.2% increase when compared to the same period in 2008.  Figures showed public sector net debt (PSND) increased to £829.7bn (59.2% of gross domestic product and £33,188 per household).  The PSND increased by £135bn in 12 months (or £4,268 per second).  The interest paid on the PSND by the Government from between April and October was £15.4bn (equivalent to £1,056 per household per annum).  Another statistics released by the British Bankers Association pointed to total credit card debt in the UK was £54.5 billion (the UK collective credit card limit on credit cards is £158 billion).

The M4 measure that the Bank of England uses to monitor the effectiveness of quantitative easing fell 0.7% from September and was down an annualised 5.3% in the three months through to October (note that The gauge excludes financial companies that specialize in intermediating between banks, such as holding companies and non-bank credit grantors).  The Centre for Economics and Business Research predicted that the Bank of England will leave the base rate at 0.5% until 2011 at least, remaining below 2.0% to 2014 stating: “The forecasts are based on the assumption that the incoming government will need to take fiscal action of around 100 billion pounds in tax rises and spending cuts to correct the fiscal deficit. If — as the bookmakers expect — the new government is Conservative, the forecasts suggest tax rises of 20 billion pounds and spending cuts of 80 billion pounds.”

November 2009

• Bank Base Rate (BBR): 0.50%
• Consumer Price Index (CPI): 1.90%
• Retail Price Index (RPI): -1.4%

Hometrack reported a fourth consecutive monthly rise as a ‘shortage of homes sustained the property market’.  The UK’s largest residential housing developer – Barratt – pointed to an increase of reservations per site by over 30% compared to the same period in 2008.  However, Hometrack also stated that the pick-up in prices has not been felt throughout the country and there are several parts that have been consistently falling. The number of active buyers which has propped up the market this year is drying up with new buyer registrations were up at  just 0.1% in November, the lowest level since the start of the year.  Rightmove also reported that average prices in November fell by 1.6% – according to Miles Shipside, Commercial Director: “In all but the most buoyant of markets, home moving comes second to Christmas festivities.  While the market has recovered from some dreadful lows, this month’s price fall proves that it does not yet have the strength to buck seasonal trends.”  The Bank of England stated that the outlook for the housing market “will depend, in part, on the supply of mortgage credit.”

Howard Archer, an economist at Global Insight, said: “House prices will probably keep rising in the next few months but are likely to suffer a relapse next year in the face of higher and still rising unemployment, muted earnings growth and the recent worsening in affordability due to house prices rising from their early-2009 lows.”

Despite a slight rise in actual quarter 2 – overall, there was positive news for UK repossessions with most areas reporting significant decreases in statistics when comparing quarter 3 of 2008 and 2009 (see our repossession statistics report).  Note the number of buy to let properties taken into repossession in the third quarter compared to the second rose from 1,400 to 1,600 – however, for the third quarter in a row, there was a decline in the number of buy to let mortgages falling into arrears (a decrease of 1.7% when comparing quarter 2 with quarter 3).  The Council of Mortgage Lenders cut its forecast for repossessions in 2009 to 48,000 pointing to strong indicators of increased lender forbearance, Government schemes to help people stay in their homes and the impact of low interest rates.  For investors in Scotland, news pointed to a 20% rise in mortgage actions taken to court in 2008-09 and a 50% rise in decrees granted.

Mervyn King stated that the pace of economic growth may be ‘pretty buoyant’ in the short term even if the recovery is not ‘pretty strong’.  A Gfk NOP report stated that Consumer confidence fell 4 points to minus 17 in November and gauge of whether people think this is a good time to make major purchases dropped seven points to minus 19.  Policy makers expanded their bond-purchase plan up to £200 billion with the Governor also saying he had an ‘open mind’ on whether to increase it further to aid the economy.  A report by the British Chamber of Commerce showed that UK companies have found it harder to obtain credit – with 64% saying it was their biggest obstacle to growth in the coming years.

December 2009

• Bank Base Rate (BBR): 0.50%
• Consumer Price Index (CPI): 1.5%
• Retail Price Index (RPI): -0.8%

An end-of-year analysis of the top 10 cities by the ‘Local Data Company’ showed revealed 142 of 900 estate agents were closing down, with chain operations being the worse hit.  Leeds was the worst hit and Bristol, Liverpool, London and Glasgow saw about a sixth of estate agencies closing in 2009.  The same survey showed Halifax has closed a third of its branches; Bairstow Eves has become a dominant chain (despite reducing branch numbers by a fifth) and the upmarket estate agents have broadly remained resilient (Savills have only closed six out of its 80 branches).  Proposals to invigorate the Residential Mortgage Backed Security (RMBS) market were announced in the form proposals of finding alternative finance to the UK.  The Treasury stated: “Developing non-bank lending channels would help to improve the future resilience of the economy in the face of financial shocks.”

Research published by the National Landlords Association (NLA) pointed to almost three quarters of landlords have experienced tenant rental arrears – 43% of which occurred in the last 12 months.  The NLA also appealed to the government to make major changes to the administration of the Local Housing Allowance (LHA) – it is estimated that total arrears across the UK could be as high as £220 million as landlords are not being passed the rent.   Vacant retail premises have also doubled from 7% at the start of the year to 15% in December with some town centres recording vacancy rates of over 40%.

GDP statistics demonstrated that the UK economy declined by 0.3% in quarter 3 of 2009 meaning that UK has been in recession for 18 months (the longest period since records began in 1955).  The Policy Exchange pointed to the fact that, whilst most people realised the burgeoning national public debt, the extent of the public sector pension debt remain hidden from view.  This debt has grown as public sector workers have been promised pension benefits often worth two thirds of final salary, index-linked for life.  The debt now stands at 78% of GDP (£1.1 trillion) with debt servicing costing close to £45.2 billion.

Many households across the UK throughout the year have struggled with fuel debts and the Citizens Advice Bureau (CAB) reported a 46% rise of people seeking assistance.  The most common reasons were low income, over-commitment, illness, disability and job loss.  They also pointed to irresponsible lending and poor financial skills adding to peoples debt problems.  According to late 2009 statistics by the life insurance brokers ‘Bright Grey’, 12m Brits (25%) are struggling to cope with their monthly bills and 39% of people have budgets so tight that they would be in trouble if they had to find an extra £50 each month.  The report also stated that essential bills (rent/mortgage payments, utilities, food, household costs etc.) now account for 68% of the average Brits household income (equates to £1,378 on average each month per person and £2,001 for families).

By the end of the year, uSwitch estimated the 7.3 million consumers withdrew over 38 million cash withdrawals using a credit card and also pointed out that the interest applied has increased significantly by 41% from 21.22% APR in 2005 to just under 30% APR.  The average interest rate on a credit card, at December 2009, is 18.04%.  The British Banking Association also stated that the proportion of balances bearing interest from December 2008 had fallen marginally by 0.6% to 65.3%.  A Price Waterhouse Coopers report estimated that, in 2009, the average borrowing per credit card has increased by 5% and surpassed £1,000 for the first time.  Research based on a Brit survey published by NS&I revealed that 63% of the population have become more aware of their finances as a result of the credit crunch and are, in turn, making a concerted effort to look after their affairs.  48% stated they knew how much they had and owed in all their accounts (although older age groups tended to be surer of their finances than younger). The survey also pointed out that 31% of savers do not think they would have enough money to cope in an emergency.  The Financial Services Authority (FSA) published research indicating that the improvement of financial capability is directly proportional to psychological well-being (moving to average levels of financial capability increases psychological wellbeing by over 5% and decreases anxiety and depression by 15%).

End of year statistics by moneysupermarket.com revealed that over 10 million people were overdrawn in the last 12 months since December 2008 (2.1 million have not come out) and people in employment wait for 27 days before dipping into their overdraft.  Research published by Abbey Savings highlighted the over one in four (28%) of British parents with young children do not have any savings or ‘nest egg’ investments for their children and a further 20% of these parents have less than £1,000 to fall back on.  Their statistics did point out that the average saver is increasing the amount they put away 26% (£206 per month compared to £163 at the beginning of the year) but the number of people depositing into their savings accounts has decreased by 6% since the start of 2009.

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In our full 2010 report, we look at what the all major house price indices / housing organisations are saying about the year ahead as well as some predictions for the economy in general (including relevant observations from the late 2009 Pre Budget Report). We then look at several investment property acquisition strategies (including lease options) followed, finally, by effective methods to conduct accurate due diligence in 2010.  To access the report (you will need to be a member of the Property Investor Hub), please click on the link below:

The Property Investor Report 2010