So many bad numbers have come out about residential real estate that they all begin to blend together. But a figure as grim as “50% decline”, applied to an entire market, even if in real rather than nominal terms, is a stunner.
This grim forecast for UK real estate comes from a futures index based on the Halifax monthly house price index. Since the monthly Halifax report released last Friday was considerably worse than expected, it’s possible that the market has overshot, particularly if it is thinly traded. But the trajectory of US housing is proving to be far worse than most had estimated initially, and UK investors are no doubt mindful of our bad example, so the price of the futures may well represent the current consensus among professionals.
From the Guardian:
The slide in house prices will continue for at least three years and crush the value of a home by almost 50% in real terms, according to a key index of property price futures. Indications from futures trading on long term property prices shows that the average UK home will recover its current value only in 2017.By the end of this year prices will be down by 10% and by a further 10.5% in 2009, according to the index. Prices will keep dropping through 2010 and cut values by 23.5% when they hit rock bottom in 2011. House prices will then begin a slow climb back to current market values over a period of about six years.
If an average retail price inflation rate of 4% is included in the calculation and in addition the 8% drop in prices over the last eight months already registered by the Halifax index, the fall in values over almost four years will reach 47.5% in real terms.
The Liberal Democrat Treasury spokesman, Lord Oakeshott, said the figures revealed that property investors had little confidence in the market and were predicting steep and prolonged falls in prices.
“This government says this housing depression will be different from the early 1990s. Yes, that’s right. It will be worse.”
When not attacking government policy in the Lords, Oakeshott invests in property on behalf of pension funds through his investment vehicle Olim. He says he has watched the index steadily fall over recent weeks. On Friday it “fell off a cliff” after the Halifax published its latest house price survey.
Halifax said the value of a home fell by 2.4% in May, the seventh month in the past eight when prices have fallen.
The May figure spooked investors, who said prices were now falling more rapidly than at any time since the early 90s property crash. House buyers benefited from low prices until 1995 when values began to pick up….
The residential property futures market is based on the Halifax monthly house price index, published by the bank. It is an-over-the-counter market designed for banks, pension funds, insurance companies and housebuilders to trade on the future values of property. Tradition Property, a City-based property broker, operates a derivatives futures index based on the Halifax figures.
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I think it is worth pointing out that property futures are the only way to take a short position in UK property. On the other hand there are many ways to take a long position, from direct investment to REITS etc.
As a result some people have argued that property futures markets have an inbuilt “technically-driven” bias towards the downside because of the predominance of people needing to open hedging (eg short) positions. Futures prices are therefore not always actually estimates of future prices but of supply-and-demand for people willing to offer “insurance” against the possibility of a slump. At the moment they will only offer this “insurance” on very cautious terms.
To put it another way, if stock futures were “too low” you could buy the future and sell the stock on margin and profit when the two converged. But how do you sell UK property on margin? I suppose you could short housebuilders or the like as an analogue, but it would not be easy or reliable.
Not that I dispute that there is going to be carnage in the UK property market. A casual glance at TV schedules over the last few years showed endless programmes such as “Property Ladder”
which suggested that any idiot can take out a 99.9% mortgage on a second home, redecorate/restore it and then flip it six months later for a £30,000 profit. I think I’ll keep renting for a bit.