He explains why:
A few positive signals from the housing market and you can almost hear the Champagne corks popping. I’d dearly love to be able to share the euphoria, not least because we’re getting bored by the recession. Sadly, I think we’re going to face some quite torrid times, particularly in the first half of 2010, both in the housing market and the economy.
House prices, and housing transactions, have been rising slowly, and from a very low base. But this is not, so far, a genuine recovery. As homeowners sat tight (and enjoyed historically low interest rates), and potential buyers waited for prices to come down, the market almost stopped in its tracks.
It only took a modest pick-up in activity among people wanting to take advantage of properties’ new found affordability for supply shortages to emerge - which in turn pushed prices up. A false recovery.
Mortgage volumes, although now at an almost two year high, are way below ‘normal’ levels. The market’s recovery has been led by existing homeowners using the equity in their properties to move up the housing ladder, plus limited numbers of first time buyers entering the market, often helped by the bank of mum and dad.
Now we have entered what looks ostensibly like a Christmas slowdown, with most recent housing market indicators showing price falls. While seasonality is no doubt part of it, this may be the beginning of a second phase of weakness stretching well into 2010. Indeed, there is little reason to believe the New Year will bring much immediate cheer to either the economy or more specifically for the housing market.
Firstly, the economy:
- My gut instincts suggest that pre-Christmas and New Year retail sales will be unspectacular. The cut in VAT to 15% did little to boost spending, but the return to 17.5% on 1 January could do more to undermine it.
- The newsflow is relentlessly gloomy. With a budget deficit of £178 billion this year and (rejoice!) just £176 billion next, could it be otherwise? Even though implementation of many of the Government’s measures will be delayed until after the election, the tax rises will hit consumers both financially and in terms of ‘feel good’ factor. And it could be even harsher under a Conservative government.
- Unemployment will rise. No matter that it has so far risen less sharply than some feared, government (national and local) will have to shed jobs to help balance budgets. In addition, many structural changes affecting businesses will lead to redundancies. The feared three million jobless total may still occur.
- The financial services sector, one of the biggest drivers of the economy, has been decimated. That means job losses, but it also means less cash to filter through into the economy, affecting taxes and spending (including on housing).
- The UK has remained in recession, when other countries have pulled out. Even Mr Darling, not the most objective observer, admits GDP will contract by 4.75% this year, but hopes will grow by at least 1% in 2010. He’s been wrong before.
- The International Energy Agency warned that another spike in the oil price, up 60% by early December, could derail the global recovery. The agency expects rising oil consumption in 2010, although that depends partly on winter demand.
Looking at the housing market:
- As the Chancellor has confirmed, the £175k cap for property transactions to be exempt from stamp duty is to disappear on 31 December. Not a positive signal.
- Arrears and possessions are still rising. CML figures show possessions undershooting their forecasts, but the situation is deteriorating gradually. 2010 will be worse than the 53,000 possessions forecast forecast for 2009, and 2011 is likely to be as bad. Moreover, government measures such as the pre-action protocol and mortgage rescue scheme (plus the moral suasion placed on lenders to exercise forbearance) and private sector initiatives such as Crown’s own assisted sales scheme reduce the number of possessions based on the statistical data. But in fact people are still leaving their homes.
- Mortgage availability remains tight, with first time buyers struggling to raise finance, virtually no non-conforming products and historically low LTVs. Existing lenders are more focused on servicing existing books and securing funding than on new lending. New lenders will emerge during 2010 but that will take time.
In conclusion:
- I fear the end of year slowdown could drag well into 2010. We could see the UK come out of recession and almost immediately slide back into it - the ‘double dip’
- From late March we will be in the throes of (a probably dirty) election campaign. This may hold out the prospect of change and new faces in charge, but it will also engender short term uncertainty. Labour is seen as tired and passé, Conservative is untried and threatens to tax us even harder, LibDem will only hold sway if there is no overall result. Indeed, arguably a hung parliament - the first in 35 years, would be the most uncertain outcome and seems increasingly possible.
People are ‘bored’ with recession, they want to spend money, they want to feel more confident, they want to buy a home or move house. But with the spectre of post-election doubts, plus a build-up of negative economic and financial news, they are likely to wait and see.
Only once the world cup in South Africa is over on 11th July (and I harbour hopes that Capello’s boys may do well) are we likely to see any real consolidation in either the housing market or the wider economy. Even then, it being summer, the pick-up will be slow.
Maybe by autumn 2010 we’ll start seeing the foundations of a real recovery and by this time next year the housing market and economy will be looking more positive again. A long haul, I’m afraid.
