Blanchard Consultancy – the independent construction consultant

The UK Government must overhaul stamp duty land tax radically to create a fairer system for consumers, says RICS (Royal Institution of Chartered Surveyors). Proposing a system that would benefit 99 percent of home buyers, RICS called on the Government to find a way of implementing the policy, which will provide a boost to the economy and the faltering housing market.

RICS proposes the abolition of the existing slab tax system*, replacing it with a two tier marginal tax system. No one will pay stamp duty on the first £150,000 of a house price. Above this value a 2.5 percent marginal rate would be charged on every pound up to £250,000, with a 5 percent marginal rate applying to every pound thereafter.

Everyone purchasing a home under £1 million will pay less stamp duty, benefiting 99 percent of all prospective homeowners. Currently, a buyer looking to purchase a £270,000 property will pay £8,100 in stamp duty. Under the RICS proposal they will now pay only £3,500, a saving of £4,600 making the property market more accessible, especially for those first time buyers struggling to pull together the funds needed to get on the property ladder.

With transaction levels plummeting first time buyers have been hardest hit seeing their home ownership dreams evaporate. With long-term house price rises outstripping wage inflation, food and fuel bills rising, and tighter lending criteria being applied by mortgage companies, the residential property market is becoming more inaccessible.

RICS Director of External Affairs, Gillian Charlesworth said:

“After having mortgages pulled from beneath their feet from lenders facing the full brunt of the credit crunch, consumers are looking to the Government for help. HM Treasury needs to find a way to implement this policy or, if they can’t do this imminently, to introduce a stamp duty holiday that will get the market moving.”


Initially the RICS proposal will reduce Government revenue by up to 24 percent, but given the 40 percent rise in stamp duty revenue in recent years (up from £4.6 billion in 2005/06 to £6.45 billion in 2006/07) there is room for the Government to manoeuvre.

The RICS proposal for Stamp duty land tax

• Slab tax system reformed to a two tier marginal tax system that reduces barriers to vast majority of homebuyers moving onto or through the market
• No-one pays SDLT on first £150,000 of home purchase
• 2.5 percent marginal rate on the value of homes between £150,000 and £250,000
• 5 percent marginal rate on the value of homes over £250,000
• The thresholds for stamp duty rates should then be annually indexed, reflecting house price growth and inflation
• Everyone purchasing a home up to £1million would pay less stamp duty
• Purchasers of the most expensive homes would pay more stamp duty. However, the increases are relatively minimal – the SDLT bill on a £1.5m home would only be 8% higher in total (£5,000 extra).
• Government would initially lose up to 24 percent of revenue.

Read more at the RICS newsroom

Labels: House market, land tax, property analysis, RCIS, Stamp duty changes, uk housing

The former BBC economics editor Evan Davis said yesterday that journalists could have done more to warn the public about the credit crunch that triggered the current housing price crash and general financial turmoil.

Davis, now a presenter on BBC Radio 4's Today, said the media may have helped to drive up the market by over-reporting statistics on rising house prices in the runup to the credit crunch crisis.

"I do ask whether we did our best to warn people of impending problems during the upswing of the [economic] cycle," Davis said at the Radio Festival in Glasgow yesterday.

"My line is, 'My God, we tried', but when everything is going well people don't want to hear it. We suffered from giving warnings a bit too early in the whole cycle.

"If, like me, you were saying in 2002-03, 'Remember folks, house prices can go down as well as up', by 2005 that warning was beginning to lose a bit of credibility," he added.

"We did warn them but didn't warn sufficiently loudly or clearly, and might have warned a little too early."

Davis, who was interviewed by his BBC colleague Jeremy Vine in Glasgow, said the media may also have helped inflate the market by reporting on every new house price survey - even when several of them were coming out in the same week.

"There was a period when online - not just online and not just the BBC - when house price stories were very interesting," he added.

"If you report the same thing five times then it sounds like they are going up even more. We in the end drive these things up just as the media did in the dotcom boom."

Read more in Guardian Housing news

Labels: Evan Davis, House market, property analysis, property boom, property prices, uk housing

There is now a very real chance that Taylor Wimpey, the UK's largest housebuilder by production, could become the first builder to fall victim to the credit crunch.

Created from a merger of Taylor Woodrow and Wimpey just a year ago, the company has stolen the dubious mantel of housebuilder most likely to collapse from Barratt Developments, after it revealed today that it had failed to secure between £400 million and £500 million of new funds from investors.

In theory, Taylor Wimpey has plenty of time to sort out its balance sheet, as it is not in danger of breaching covenants on its £1.7 billion debt until February. In the meantime, short-term cash flow is good and the company has taken tough measures to make sure it stays that way by closing a third of its offices and almost a fifth of its staff.

Full Story at Times Online

Labels: Barratt Developments, Housebuilders, property analysis, property development, Residential property, Taylor Wimpey

The scale of the problems facing the building industry was underlined yesterday when new figures showed British construction activity fell at its fastest rate in 11 years in June.

The Chartered Institute of Purchasing and Supply's construction PMI index fell for the fourth straight month to 38.8 from 43.9 in May - the weakest reading since the survey began in 1997. The housing sub-index was also the lowest ever, falling to 25.6 in June from 32.7. A score below 50 indicates a contraction.

"Housing bore the brunt of the credit crunch fallout, reflecting the steep decline in new housebuilding," said Roy Ayliffe of CIPS.

Housing minister Caroline Flint, who will publish a package of rescue measures this month, is trying to salvage the government's commitment to build 3m homes by 2020.

She said reforms would allow the Housing Corporation to pay 80% upfront to developers, rather than the current 50%, before work starts on housing projects. This would enable the corporation - a government agency overseeing social housing projects - to increase the pace of approvals and deliver much-needed affordable housing while supporting developers.

She said a national clearing house was being set up so housebuilders could approach the corporation with proposals to sell their unsold stock for affordable housing. The government has committed £200m for the purchase of unsold stock from housebuilders, which could then be used for social or affordable housing. The clearing house would give developers an indication of their chances of the social housing sector buying the unbuilt property.

She also said a further £270m from existing budgets would allow the corporation to provide an extra 3,800 homes for social rent and 1,500 shared ownership homes over the next three years.

Flint hopes the measures will prepare the industry for an upturn in a year or two year's time, as well as enabling councils to use their resources to keep the housebuilding programme going. The government's advisers - the National Housing and Planning Advice Unit - warned at its annual conference that even if house prices fell by 5% to 10%, there would still be an affordability crisis.

The government's targets for housebuilding have been fiercely criticised by regional assemblies for their lack of realism. For example, 49,700 new homes a year are proposed for the south-east compared with 28,900 planned.

But Flint said: "There is an overwhelming case for building more housing and we must remain as ambitious as possible. But ... we have to acknowledge not only the difficulties faced by individuals and families, but by housebuilders too."

A spokesperson for Shelter said: "This package gives the building industry a much needed kick-start."

Read more at Guardian Business

Labels: Housebuilders, property analysis, property development, property prices, Residential property, uk housing

The Carsberg Review of Residential Property should be the basis for major reform of the residential property sector, says RICS (Royal Institution of Chartered Surveyors).

In particular RICS endorses the view that consumers should be central to any reform, with emphasis placed on providing better information and basic protections for any person buying, selling or letting property.

Sir Bryan’s review highlights three key issues that should be the foundations for reform:

1. The property transaction process and the provision of information for consumers need revision – Home Information Packs (HIPs), introduced in England and Wales, have not improved the process as intended.
2. Regulation and redress schemes need to be consistent with universal participation - the current regime of voluntary regulation and redress is insufficient.
3. Consumer interests need to be at the heart of all policy making

Citing research from Which?, the OFT and ComRes* - all of which confirm that significant levels of dissatisfaction exist amongst buyers and sellers of residential property - Sir Bryan concludes that the current transaction process is unsatisfactory for those who use it.

He also states that those who offer estate and letting agency services to the public, must be qualified and properly regulated.

Lack of knowledge of the systems and frustration with processes are driving dissatisfaction, says Sir Bryan, and both are areas RICS is keen to see addressed.

Speaking at the launch of the independent report, Gillian Charlesworth RICS Director of External Affairs emphasised the value of taking steps now.

"Sir Bryan’s review highlights a number of key areas where the current approach is clearly failing.

"The processes for regulation and redress do not go far enough to protect the consumer and we agree that participation in regulatory and redress schemes needs to be both consistent and universal.

"They should include all estate agents, letting agents, managing agents and landlords.

"The Industry itself is already coming together to tackle these issues, through the creation of the Industry Standards board, however there are limitations as to what this voluntary approach can achieve.

“It is important that we all take steps now to make the necessary improvements.

"We need action not words. Government needs to acknowledge this, deliver its support for Industry action and do more to protect the public."

RICS will now undertake an in-depth consultation with the aim of developing a formal response to Sir Bryan’s recommendations.

"We remain committed to building a coalition that can deliver property policy reform", concluded Charlesworth.

For more info visit RCIS

Labels: RCIS, Residential property, Sir Bryan

Homeowners have started to drop their asking prices as the reality of the downturn in the housing market hits home, a report out today shows.

The property website Rightmove said the average house price fell 1.2% to £239,564 in June, from £242,500 in May, and further reductions would be required to sell homes where there was an oversupply. It suggested what buyers could afford would continue to deteriorate because of rising living costs and higher mortgage rates due to the credit crunch.

Miles Shipside, commercial director of Rightmove, said: "For most sellers that will mean whatever they thought of asking for their property at the peak of the boom, they need to take at least 10% off. Otherwise their property will stagnate.

"In spite of the lowest housing transactions for 30 years, new sellers had been coming to the market asking record prices. It was a mad state of affairs that defied the laws of economics. Thankfully, new sellers are now taking some proactive steps to price more realistically from the outset to attract increasingly hard-pressed buyers."

The biggest drop in house prices was in the south-east, where they dropped 2.4% to £303,828 in June. In the south-west they decreased 2.2% to an average £258,696. Prices fell 1.6% to £225,565 in East Anglia and 1.4% to £399,010 in Greater London.

Although asking prices rose in the north, the West Midlands and Wales, these areas have seen some of the steepest price falls in previous months, with average asking prices 3% lower in the West Midlands than they were a year ago, and 2.6% lower in Wales.

The lack of buyers is widely blamed on tighter mortgage lending conditions.
The Council of Mortgage Lenders said that lending almost halved during the first quarter of 2008, resulting in 142,300 mortgages.

Halifax, Britain's biggest mortgage lender, announced last week that it would raise its fixed rates on loans by half a percentage point - the 20th time it has changed its rates since the start of the year.

Homeowners who have more than 25% equity in their houses face an increase on a two-year fixed-rate mortgage from 6.49% to 6.99%. On a £150,000 home loan, this adds £47 a month to repayments.

The increase follows similar moves from several rivals in the past week, including First Direct, which raised what had been the cheapest fixed rate on the market.

The number of properties for sale in the UK now outweighs the number of buyers by over six to one. There are 25% more properties on the market than six months ago, which means that 1 million sellers are competing for just 150,000 buyers.

Average unsold stock per agency branch rose to a record 75 homes, up from 73 the previous month.

Rightmove used the asking prices of up to 200,000 properties for its figures.

Read more at Guardian Money

Labels: House market, House prices survey, property prices, Residential property, Rightmove

Shares in Barratt Developments soared yesterday after reports that the embattled housebuilder had reached a deal with banks to put its finances on a firmer footing.

The company's shares jumped more than 25 per cent after Building magazine reported that the housebuilder had reached an agreement with banks to waive a clause that would have put Barratt in breach of its banking covenants after a land valuation writedown later this year.

Analysts said the reported deal was a encouraging sign that banks would help not to allow housebuilders to break their covenants.

The agreement would make other refinancing options that have been mooted in recent weeks, such as a debt-equity swap or a share issue, much less likely for the sector's most indebted.
It was reported that the waiver would remain until Barratt had repaid the remaining £400million it borrowed to fund the £2.2billion acquisition of Wilson Bowden in February last year, and that it has until the 2011 to do so.

The banks - Royal Bank of Scotland, UBS, HSBC and Lloyds - joined Barratt in saying that they would not comment on the reports but the housebuilder confirmed that talks were continuing.

A Barratt spokesman said: “We continue to have constructive discussions with all of the banks and have nothing to add to our statement from last week.”

However, sources close to the talks played down the reports, saying no such deal had been made yet.

That did not stop the speculation sending shares in Barratt soaring, with other rivals such as Persimmon and Taylor Wimpey also seeing rises close to double digits on the back of the market rumours.

Shares in Barratt closed up 12 per cent, or 9.5p, to 87.75p.

The possible deal was first suggested last week when Mark Clare, the chief executive, said he believed “we could get some sort of waiver” from banks allowing limits to be breached temporarily while the company looked to secure funding from sales or from investors.

Despite the jump in price, Barratt's shares are currently worth a tenth of their value a year ago.

Original story from Times Business

Labels: Barratt Developments, Building Magazine, House market, Housebuilders, HSBC, LLoyds, RBS

A backbench Bill to let councils decide how much renewable energy developers should include in their schemes has won cross-party support when it was debated by the Lords for the first time today.

The Planning and Energy Bill cleared the Commons and gained an unopposed second reading after its introduction by Tory former minister Michael Fallon.

The legislation would allow councils in England and Wales to require a proportion of the energy used in developments come from renewable sources. They would also be able to set higher energy efficiency standards than current rules demand.

Tory Lord Hanningfield, who introduced the Bill, said it follows a pioneering initiative by the London Borough of Merton.

Merton requires at least 10 per cent of the energy needed for new housing developments to come from renewable or low carbon sources.

Lord Hanningfield told peers that the Bill was "permissive, localist and green" and "allows councils to act quickly without waiting years for other legislation to come into effect".

In the Commons ministers initially opposed the proposal, but later backed it after amendments were made to ensure councils did not take actions in conflict with national policies.

Read more.

Labels: Green housing, Planning and Energy Bill, property development

More and more households are hitting trouble with their debts, says Julian Knight, but there are better solutions than IVAs or sale and rent-back.

People feel the bills mounting up and then they are falling behind with their mortgage. Often they do not face up to it until they are being taken to court. Sadly in about one in five cases we advise on, we have to tell people they will lose their home."

These are the words of Frances Walker at debt charity the Consumer Credit Counselling Service (CCCS), which recently launched a helpline for people in mortgage trouble (0800 138 1111) as the rising cost of living drains their resources. Likewise, the National Debtline charity reports a 23 per cent rise over the past year in the number of people coming to it citing mortgage arrears.

Paul Mullins, chief executive at National Debtline, says some lenders, facing the new reality of falling house prices and tighter personal finances, are now giving people in mortgage difficulties a more sympathetic hearing: "Attitudes have changed from a couple of years ago. The lenders know that, in the current market, they won't get much for a property repossessed and then sold at auction."

But Ms Walker says that lenders – particularly in the sub-prime market – are still expecting too much of those in debt difficulty, applying pressure and loading late- payment penalty charges.

Under these circumstances, it's easy to see how the old maxim "desperate times call for desperate measures" might appeal to some borrowers. However, some of the radical solutions available to people in arrears can often backfire. In particular, critics have rounded on providers of individual voluntary arrangements (IVAs) and sale and rent-back schemes.

In recent years, more and more people have taken out an IVA – a type of insolvency where the debtor agrees with his creditors to repay a certain percentage of his borrowings over a set period. Sometimes, up to 75 per cent of the debt can be written off. However, IVAs are highly controversial because the firms that act as go-between often charge hefty fees and impose penalties for missed repayments. Some in the banking and debt charity sectors have also accused IVA providers of in effect mis-selling the products, persuading people to sign up when other options may be better.

All in all, says Mr Mullins, this is not a "magic bullet" solution. "If you can't pay your mortgage, an IVA won't help. Your lender has a secured charge against your property which an IVA can't get you out of. You may be able to reduce your outgoings through an IVA so you can better concentrate on the mortgage, but in reality it is unlikely to work like that."

Even greater problems can arise for those tempted by sale and rent-back. These schemes promise to pay a proportion of a home's value, normally around 70 per cent, so quick cash is obtained to pay off the mortgage company. At the same time, the seller is offered the chance to remain in the property as a tenant for at least 12 months. But Ms Walker says the CCCS does not recommend sale and rent-back to as it is "completely unregulated".

Even those in the industry acknowledge there are big pitfalls. "For starters, sellers are offered around 70 per cent of what is, in effect, the purchaser's own valuation of the property," says Dougie Lister, chief executive of sale and rent-back firm the UK Housing Alliance. "What's to stop the valuation being under the odds. In addition, most only offer a 12-month agreement, at the end of which they can chuck the tenant out." He adds that his firm offers 10- year tenancies and uses independent valuers.

So what can people in arrears do? The truth is that this is a long slog, and Mr Mullins offers the following tips: "First look at your income – are there any benefits or tax credits you're not claiming? If you have a spare room, rent it out. Then draw up an expenditure budget; you can show this to your lender and, as a last resort, you may want to ask it to extend your mortgage term." However, this will mean more interest will have to be paid. An alternative is to ask for a payment holiday. "This is a temporary halt designed to give the borrower some breathing space to sort out their finances," adds Mr Mullins. But it's completely at the lender's discretion whether they grant a holiday or not."

Unfortunately, no matter how proactive borrowers are, they are at the mercy of their lender. "Attitudes vary markedly," says Ms Walker. Some lenders expect arrears to be paid back – as well as the normal monthly repayments kept up – within a year. Others will allow longer."

And some lenders, she adds, are quicker than others to go for the nuclear option. "We hear of cases where people have only been in arrears for a short period and repossession proceedings are started. But as a rule, around three months is when lenders get very serious."

According to Mr Mullins, lenders that do rush for repossession are likely to get short shift, but only if the borrower acts. "Courts want people to stay in their homes and don't look kindly on lenders that want to repossess after a month or two of arrears. The problem is that fewer than half of people who face repossession turn up for the hearing. The courts allow 85 per cent of people who do turn up to remain in their homes."

Read more here.

Labels: CCCS, House market, IVAs, Mortgage lending, Mortgage rates, property prices

Barratt Developments has won the fiercely contested takeover battle for its smaller rival Wilson Bowden with a £2.2bn agreed bid that will create the UK's biggest homebuilder.

The deal, a record for the sector, will mean a windfall of about £700m in cash and shares for Wilson Bowden's chairman and co-founder David Wilson and his family, who together own about 37% of the company.

The auction process was sparked by Mr Wilson's announcement in July that he was reviewing his family's stake. The combined group will have a 12% market share, ahead of Persimmon, and the deal is likely to catapult it into the FTSE 100.

Barratt beat stiff competition from other bidders, including a consortium led by the Scottish billionaire Sir Tom Hunter, which is thought to have been backed by the private equity arm of HBOS. George Wimpey, another builder, also made it to the final stages of the auction.

Barratt will pay 950p in cash and 1.0647 new Barratt shares for each Wilson Bowden share, valuing Wilson Bowden shares at £22.45 each.

Mark Clare, who took over as Barratt's chief executive in October, described the acquisition as "outstanding". He said: "It creates a powerhouse for organic growth going forward. This company will lead the sector."

Evolution Securities analyst Simon Brown said: "This is a coup for Mark Clare ... who has an ambition to drive Barratt to the forefront of UK housing, and with this deal he will succeed."

Barratt has secured irrevocable acceptances from investors holding 37.7% of the shares - Mr Wilson and his family, and Wilson Bowden's directors - and any counter-offer would have to be 10% higher than Barratt's agreed bid. Wilson Bowden shares fell 38p to £22.75 on news of the agreed bid.

The acquisition gives Barratt the David Wilson luxury homes brand, with an average sale price of £203,000, and while Barratt mainly operates in the north and south of England, Wilson Bowden focuses on the Midlands. Barratt has pencilled in synergies of at least £45m from removing overlap between the two businesses and increased purchasing power, while it estimates integrating the two companies will lead to one-off costs of £35m.

Mr Clare said there will "inevitably" be some job losses, but he refused to give details. He praised Wilson Bowden's management but said Barratt had not decided yet who would stay on. The two companies employ a total of 7,500 people.

Original story from Guardian Business.

Labels: Barratt Developments, Geroge Wimpey, Housing market, property prices, uk housing, Wilson Bowden

The stream of bad news coming out of the housing market has grown into a torrent in recent weeks, with stories of falling house prices, withdrawn mortgage rates and warnings about payment shocks.

This week, even Prime Minister Gordon Brown felt he had to defend the state of the UK's housing market.

Halifax, the country's largest mortgage lender, announced that house prices fell by 2.5 per cent between February and March, which prompted the PM to concede that "there are difficulties in the housing market" but that a 2.5 per cent drop "is containable".

To help you separate fact from fiction, we reveal the truth behind the assumptions that could cost you money in a falling market.

All the best mortgage deals have vanished

Nationwide recently announced it was restricting its best rates to people with more than 20 per cent deposit but it is not true to say that there are no competitive deals available.

"For borrowers with either a large deposit or a good amount of equity in their home there are still competitive deals available," says Denise Harvey, a mortgage analyst with independent financial comparison service Moneyfacts

West Bromwich Building Society is currently offering 4.99 per cent fixed for two years, for loans up to 75 per cent of a property's value, although there is an arrangement fee of £1,999 to contend with. And Abbey is offering a one-year discounted variable rate of 5.24 per cent with a maximum loan to value of 75 per cent and a fee of £499.

And even for borrowers with less equity in their homes there are still some good deals available. For those with a 5 per cent deposit there are competitive deals available. The Cheshire Building Society is offering a three-year fixed rate of 5.49 per cent, with a fee of £899.

One thing that has changed, however, is the speed with which these rates are being withdrawn and to take advantage of the best rates borrowers have to be prepared to move quickly.

"If borrowers are looking to re-mortgage or move they should be in as good a position as possible. When they are in a position to submit an application they should have everything more or less 100 per cent perfect," says Harvey.

Don't buy now

For first-time buyers struggling to get on the housing ladder falling house prices are very welcome. However, unless prices start to fall at a consistently fast rate the decision to wait could be a false economy, warns Melanie Bien, of mortgage broker Savills Private Finance.

She says that unless you are living with parents, the amount that a prospective buyer pays out in rent, particularly in parts of the South-east, can offset any decrease in the purchase price of a house.

Someone paying £800-a-month rent, for example, would pay an extra £4,000 by delaying a purchase for five months.

"While you would have been paying a mortgage if you had bought instead of renting, you will still want to make sure you end up in front once the difference is deducted from the potential fall in property values," adds Bien. "First-time buyers would be better off making their decision based on affordability and finding a suitable property."

Andy Pratt, chief operating officer of mortgage broker Alexander Hall, says prospective buyers should talk to a mortgage broker and work out how their rent compares with the cost of buying. Buyers should also consider that buying a home is a long-term commitment and not a short-term speculation on house prices.

"Unless you believe house prices are going to correct by 20 per cent or more, it is a long-term investment and people should be out there looking. It is a buyers' market and there are some bargains to be picked up," says Pratt.

No deposit – no mortgage

Mortgage lenders have been keen to move out of higher risk areas of lending and, as many first time buyers are now finding, high loan to value mortgages are one of the areas they are avoiding.

First to go were those deals offering more than 100 per cent of a property's value, as a combination of a mortgage and personal loan, and the last two weeks have seen an increasing number of lenders move to withdraw loans offering up to 100 per cent of a property's value.

"In essence, all the 100 per cents have disappeared and there are fewer lenders offering 95 per cent. So there are some mortgages available but their criteria for 90 per cent or higher are far tighter than they were before," says Pratt.

To get around this, he suggests speaking to family to try to raise the deposit. "Be prepared to consider parents and family for deposits or look at finding some other funding, such as savings they have made for a rainy day, and use as much as they can for a deposit," Pratt adds.

Buy-to-let landlords are fleeing the market

Many commentators have predicted a deluge of buy-to-let property coming back on the market as landlords try to exit the market, encouraged by a combination of low rental yield, falling house prices and a change to the capital gains tax (CGT) rules – which means many owners of second homes will pay only 18 per cent instead of 40 per cent CGT on the profits of a sale.

Alexander Hall's Pratt says long term professional landlords are in the market for the long term and are not put off by market jitters. But part-time landlords, with only one or two properties, will be looking at the exit.

"The dynamics have fundamentally changed. A large proportion of those will consider selling and looking at other investments," says Pratt.

However, while the tax changes will encourage some "profit taking", demand for rental property is still high and the majority of landlords are in it for the long haul, adds Bien "Most landlords see property as a viable alternative to a pension, as a way of saving for retirement, so regard it as a long-term investment," she says.

Is there going to be a house price crash?

Prices are certainly coming down. The 2.5 per cent drop reported by the Halifax is the biggest single drop in house prices since the price crash of 1992.

But this is not an exact picture, as prices are still 1 per cent higher than they were last year and there are big regional variations. Prices in Greater London are up by a further 1.6 per cent this month, and in the East Midlands they are up by 2.2 per cent. But this is offset by some big falls, with prices in Wales and the West Midlands down almost 5 per cent.

Martin Ellis, chief economist at Halifax, says that a house price crash is unlikely. The crash of the early 1990s had a different economic profile with rapidly rising inflation and big increases in interest rates and unemployment.

"That's a long way from where we are at the moment," Mr Ellis says. "Yes, we're expecting to see the economy slow over the course of 2008, and that's likely to see some upward movement in unemployment but we don't expect this to be dramatic." His prediction is for "low, single-digit" house price falls this year.

But others estimates are not so optimistic. The International Monetary Fund suggests in a report published this week that the UK housing market will follow the US example, but on a two-year time lag. This would be very bad news for UK homeowners as the US house prices fell by more than 11 per cent in 2007.

For more info visit the original story here.

Labels: Alexander Hall, Halifax, House market, IMF, Mortgage lending, Mortgage rates, Nationwide, property prices, uk housing

Owners of poorly maintained homes or those in scruffy neighbourhoods must slash their prices by as much a fifth if they want to find a buyer. But, despite the downturn, grander properties in most upscale locations are still selling for more their original asking price, according to research from Savills conducted for The Times.

The only exception to this ‘the best sells, the rest sticks’ trend, is those properties between £1 million to £2 million in London’s smartest postcodes, favoured by City executives.

Job losses in the Square Mile and Canary Wharf mean that any owner who needs to move quickly must accept a price at least 6 per cent lower than at the height of the boom in 2007.

Simon Edwards of Savills, Hampstead said: “A year ago you could put a house on the market for £1 million and sell it for £1.05 million. Now it would probably make £950,000. That £100,000 difference effectively means a 10 per fall in prices.”

‘Blighted’ homes, those that are unmodernised, or in lower grade locations in all parts of England are changing hands at prices 6 per cent to 20 per cent lower than a year ago.

This would suggest that the market has fallen more sharply than the major property prices indices indicate. Halifax figures out yesterday reported a 3.8 per cent since May 2007.

However, some sectors are relatively immune, with what Savills terms ‘best in class’ homes in all price brackets still buoyant. If you want to dispose of a £2 million-plus property in the Midlands or the North, you should find a ready buyer and expect to pocket more cash than a year ago.

Original article here.

Labels: House market, House prices survey, property prices, Savills

The stock market value of British housebuilders has plunged by £11.34 billion in just 12 months and is set to fall further after two investment banks warned today the housing market downturn will descend to levels last seen in the early 1990s.

Barratt Developments emerged as the sector's hardest hit company for the second day, after its share slumped by 26 per cent.

Barratt, which is now worth just £300 million but has debts of £1.7 billion after its acquistion of Wilson Bowden last year, is expected to seek emergency funding, possibly through a debt-for-equity swap.

Barratt is now worth less than a tenth of its peak stock market value.
Taylor Wimpey, the UK's third largest builder by volume and the result of the combination of Taylor Woodrow and George Wimpey, also plummeted by 20 per cent.

The losses compounded heavy share price falls yesterday, which wiped £400 million of the market value of the builders. Since last June, the housebuilding sector, then worth £15 billion, has seen its shares plunge by 76 per cent.

Shares in Persimmon, the last remaining housebuilder in the FTSE 100, were also down 9 per cent in early trading to 353p, their lowest point for five years. Persimmon faces ejection from the FTSE later today.

Berkeley Group shares also slid 9 per cent to 666p after Goldman Sachs reduced its recommendation on the UK housebuilder to "sell" from "neutral" and dramatically slashed its target price from 819.9p to 582.3p.

Analysts at Merrill Lynch said: "The early 1990s housing market has increasing relevance as a comparator."

They added: "There is growing evidence of consumers how behaving in a manner similar to that seen in the early 1990s, in that concerns over job security and falling house prices are leading to a reluctance to make a house purchase."

Merrill Lynch downgraded six housebuilders in the sector - cutting Barratt Developments, Bellway, Berkeley, Galliford Try and Redrow from "neutral" to "underperform", while Persimmon was moved to "neutral" from "buy", traders said.

There are fears that many housebuilders will be forced to make dramatic writedowns. In the early 1990s, housebuilders wrote down 30 per cent of their value - about £1.3 billion - and many of them needed more than one writedown before their net asset value stabilised.

The sector has been squeezed by banks tightening up on mortgage lending following the credit crunch, hitting the housing market. Many builders have put projects on hold, as willing buyers have dried up, and are laying off staff, while concerns are mounting in the City that many will have to ask shareholders for cash to strengthen their finances.

Housebuilders have also become a target for “short-sellers” who hope to profit from falling share prices. According toresearch from Data Explorers, which monitors short positions in the market, more than 23 per cent of Bovis shares are on loan with “short” investors, followed by 19 per cent for Persimmon and almost 18 per cent for Redrow.

Latest figures from the Royal Institution of Chartered Surveyors, out yesterday, said agents sold an average of just 17.4 properties each during the three months to the end of May, the lowest figure since it began collecting data in 1978.

Merrill Lynch has turned its focus on unemployment levels saying that they will be critical to determining consumer confidence and housing transaction levels, as was the case in the early 1990s recession. The broker suspects that rising unemployment will put additional pressure on housing transaction volumes.

It believes that there will be 10 per cent fewer house sales than last year and that prices will fall by 10 per cent.

"We believe we have gone beyond the tipping point and are now clearly seeing a UK housing market being squeezed on opposing fronts - by a lack both of willing lenders, as well as willing purchasers," the bank wrote.

It suggests that housebuilders are entering a prolonged period of underperformance, with a downturn likely to persist over the next three years.

"We are inclined to believe that if 1988-89 corresponds to 2007-08, than 1990-91 would correspond to 2009-10," Merrill Lynch said.

After the early 1990s recession, house prices did not start to recover until 1994.

Original Story from Times Business Online.

Labels: Barratt Developments, Berkeley Group, House market, Housebuilders, Merill Lynch, Persimmon, property development, RCIS, Redrow, Taylor Wimpey, uk housing, Wilson Bowden

The Bank of England held interest rates steady at 5% yesterday as it decided inflationary risks were too great to allow it to cut borrowing costs to boost the flagging economy.

The monetary policy committee's decision followed a flurry of gloomy data about the state of the economy in the UK and beyond, and appeared to be backed by a senior figure at the International Monetary Fund, who suggested global inflation is back and policymakers should act aggressively if things start to get out of hand.

John Lipsky, the IMF's deputy managing director, said in New York: "Signs of more general inflation pressures would justify a decisive policy response, lest the impressive gains in global stability attained in recent years be sacrificed."

There had been calls for the Bank to match last month's quarter-point cut and bring some relief to the struggling property market. Nicholas Leeming, of propertyfinder.com, was unhappy at the lack of action: "The Bank can't afford to wait another month before it acts again. Mortgage lenders have all but withdrawn from the market, leaving many homebuyers unable to qualify for financing and many unable to get it at a price they can afford.

"The housing market has come to a standstill but there's no shortage of buyers, just a shortage of mortgages, which is now impacting the wider economy. Inflation remains a threat, but further immediate intervention, as well as future rate cuts, is now essential to stimulate lending, the housing market and the economy."

The decision had been widely expected in the City, though some economists had expected the MPC to cut rates after a run of weak data from the dominant services sector, the manufacturing sector, the housing market and the retail sector.

David Kern, economic adviser to the British Chambers of Commerce, said he was disappointed the MPC had not cut rates. "We believe this decision was a mistake given the serious threats to economic growth. The MPC has missed a valuable opportunity to underpin business and consumer confidence and to limit the potential damage to the economy."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said that slowing economic activity was the most pressing issue for the authorities. "Housing transactions have collapsed, consumer confidence has sunk to its lowest level since 1992, the service sector appears close to stagnation according to the latest CIPS survey and the retail sector is under immense pressure."

With mortgage approvals down nearly to half what they were a year ago and housebuilders' reservations having tumbled by two-thirds, economists are concerned that falling house prices and tumbling consumer confidence could lead to a slump in consumer spending, which accounts for two thirds of the economy.

Latest estimates suggest the economy has slowed to well below its long-term average growth rate and is likely to slow further. However, the MPC is conscious that inflation is above its 2% target and likely to rise in the coming months.

Lipsky said inflation concerns have resurfaced even as global growth slows. "The effects of the slowdown are being felt most keenly in the US, but growth in all regions of the world is slowing," he said.

The IMF remains optimistic that the world will not experience a return to a 1970s-style inflation spiral, although the risk of such an outcome could not be dismissed, Lipsky added.

Oil prices hit a fresh high of $123.93 on Wednesday and the AA is releasing figures today showing the cost of motoring has risen 11.5% over the past year.

The government will announce measures today to help homeowners facing difficulties with repaying their mortgages.

The European Central Bank left eurozone interest rates at 4%. The ECB faces higher inflation than in Britain so is even more reluctant to cut borrowing costs.

Full story posted here.

Labels: Bank of England, ECB, Housing market, IMF, MPC, property prices, RICS, UK Interest rates

Land and property developer switches focus to sites offering a mix of housing and commercial premises.

MacDonald Estates, the land and property developer, is predicting further growth this year despite tough market conditions after posting a profit of £5.1m for 2007.

The figure is an increase of 14.1% on the previous year and the ninth consecutive year of profit growth for Macdonald, started by entrepreneur Dan Macdonald in 1998.

But the Edinburgh-based company is planning to shift its long-term focus from purely commercial developments to building strategic new “mini-towns” including a 330-acre site it has identified in central Scotland. Other sites include Inverness and St Andrews.

Macdonald, chief executive of Macdonald Estates, said that by 2012, its focus will be almost exclusively fixed on community developments, with local power generation, sustainability and infrastructure as well as commercial premises.

“I am confident we will see the continuation of further profit growth through to 2009 as a number of our developments reach maturity,” he said.

The first site to be developed is a 260-acre site at Balloch Farm, Inverness, with a mix of housing and commercial. All the sites Macdonald has identified are in areas which are likely to be rezoned. Balloch is up for zoning in 2011.

“These new settlements are going to be the focus of the business and will allow us to use the expertise we have built in working with planners from the outset rather than just slapping an application in for consideration,” said Macdonald.

“Some will have gestation periods of 10-20 years although others might come through more quickly.

“These are not the eco-towns that Gordon Brown talked about but smaller mixed developments in areas where there is demand.”

Some of the other future developments for the company include a planned £100m hotel and office development at the SECC Glasgow and construction work on a £30m development at Falkirk Gateway, which starts later this year.

Macdonald also has plans to open an office in Dublin, furthering a commitment to business in the Irish republic. Plans are about to be submitted for a ¤40m (£31m) retail park at Portlaoise, an hour’s drive southwest of Dublin.

Macdonald appointed former Scottish Enterprise Fife chief executive Joe Noble as director of strategic development and infrastructure for the company last month.

Macdonald said: “I am in no doubt that we will see recessionary times and hear more accounts of bank write-offs, a further slide in capital values, greater inflation, raised debt, high bank charges, fire sales and a restrictive residential market.

“We should not delude ourselves. The Scottish market will be affected to a great extent.”

Original story here.

Labels: Dan Mcdonald, Macdonald estates, property analysis, property development, property prices, Scottish property market

The property boss wants the government to encourage firms to focus on green issues.

Sitting in the boardroom of Grant Management’s head office in Edinburgh’s West End, the last thing that comes to mind is the plight of Cambodian fishermen.

But not for Peter Grant, who used redundancy money to found the property management and investment firm with his wife Collette more than a decade ago.

Grant Management has grown from owning a few properties bought for his pension to managing some 1,800 in the UK. Last year, it turned over £12m, generating more than £1m in profits.

Its fund management arm, Grant Fund Management, runs three institutional property funds with Bank of Scotland, Sir Tom Hunter’s West Coast Capital and Buccleuch Property. These have a combined value of more than £200m.

Recently, weightier matters have taken up some of his time. Inspired by Bill Clinton’s visit to Glasgow in 2006, when the former US president spoke of global warming as the “number one priority”, Grant set up Global Trees, an environmental charity.

It has now planted more than 300,000 trees worldwide. But Grant wants that figure to run into tens of millions. The charity has no paid staff and every pound donated goes towards the planting and maintenance of trees, as well as a programme to ensure they are not quickly cut down.

His company is itself now carbon neutral, either by reducing its impact on the environment or offsetting.

“You have to use energy to run a business but ensuring that light bulbs are low-energy or computers are switched off plays its part,” he said.

“A few years ago, it was simply a box to be ticked by business when talking about corporate governance but I detect there has been a major change. When a company the size of Wal-Mart says it wants to know the carbon footprint of its suppliers, then you have some idea of how this affects everyone.”

Clinton got to hear of Grant’s efforts and invited him to New York for dinner.

“It was fascinating and inspiring,” said Grant.

“We have now planted 300,000 trees in many places around the world. In Cambodia, for example, we planted mangrove trees which help the fishermen in the swamps by improving the storm barriers.

“In the UK a lot is being done too. It is great when you see a company such as Stagecoach going carbon neutral along its Fife to Edinburgh bus route by planting thousands of trees.”

The Global Trees website has a carbon calculator. “People are surprised at how much CO2 we generate individually,” said Grant. “Things like rising fuel prices have an effect because people have to use their energy more efficiently and it means clever ideas about generating energy from other sources become more cost-effective.”

Running Grant Management still takes up most of Grant’s time. His company buys, renovates, lets and manages residential property, mainly in university towns, for private and institutional clients. Is he worried about the property slowdown?

“It would be foolish to suggest anyone is immune but it does not fundamentally affect our business plan,” he said “If anything, it opens up opportunities. We are in places with demand. We are in university towns, we do not buy new-build, two-bedroom flats, of which there is a glut, and on top of that, if prices come down, we are in a strong position to take advantage.

“The tougher conditions will also shake out some of the competition. However, investors are becoming more wary. Some people are waiting to see what happens but, in some ways, there has never been a better time to invest.”

Economic conditions, though, have hit Grant’s plans to float the company. He had targeted this year, or 2009 for a listing but, while entering the stock market remains an aim, it has been put on hold.

Green concerns are not so easily put aside. He believes governments should do much more to encourage companies and people to focus on environmental issues.

“The prime minister spoke last week about the need to boost oil production and I understand why, but I would also like to see the UK government commit just £50m to planting trees in the Third World countries,” he said. “It is not a lot of money, would show we were committed and would make a substantial difference.”

Peter Grant is the key speaker at the first in this year’s series of Albion Dinners, hosted by the Marketing Society Scotland in conjunction with The Sunday Times, which takes place on June 5 at Lloyds TSB Scotland’s headquarters in Edinburgh. The topic for the evening is how business can embrace and profit from the challenges of global warming.

Original story here.

Labels: Global Trees, Grant management, Green housing, Peter Grant, zero carbon housing

The rising costs of transport and raw materials and a shortage of tradesmen is pushing up the costs of home improvements, according to new figures by RICS’ Building Cost Information Service (BCIS).

BCIS’ updated Property Makeover Price Guide gives homeowners an accurate guide to what they should expect to pay for home improvements. It has found the average cost of improvement work has risen by 20% over the past two years for a number of reasons.

No longer can homeowners pick and choose from the glut of quality EU tradesmen as the number of central and eastern European nationals returning to their native countries is on the rise. With half of the estimated one million British based Poles having already left the UK,competition for labour is pushing up costs.

The upward trend in oil prices is continuing to fuel the rising cost of transport, with forecasters predicting oil to rise to $200 US (£100) per barrel in the next few years, some experts are predicting this to have more impact on economies than the credit crunch crisis.

Global demand for raw materials remains at an all time high, with emerging giants like China and India showing no signs of a slowdown, commodity prices will remain high for years to come. This is no more evident than in the various trades where the cost of materials have pushed up the overall costs. Roofing costs have risen by 26%, plumbing and electric work by 22% and painting has risen by 17%, all outstripping inflation over the past two years.

BCIS Executive Director, Joe Martin, said: “The downturn in housing is forcing some homeowners to become more creative in meeting their needs. Many are choosing to stay put and renovate or extend in order to upgrade their property. This can be a wise strategy as home improvements add value to a property, and people will be well placed to take advantage of this uplift in value when the market shrugs off the current slump.

"Given that the cost of home improvements rose by 20% over the past two years compared with only eight percent in average wage growth, many homeowners are opting to act now rather than paying more further down the track."

Relevant Links:
www.bcis.co.uk

Labels: BCIS, building costs, home improvement, House market, Housing market, uk housing

The zero-carbon homes of the future should self-generate the vast majority of the energy they use, but a small amount of near-site or off-site renewable generation will also be allowed, a report says today.

The UK Green Building Council's (GBC) new report, The Definition of Zero Carbon, was thrashed out by a range of stakeholders trying to work out a blueprint for the provision of zero-carbon homes from 2016 mandated by the government.

The GBC's zero-carbon task force was chaired by Mark Clare of Barratt Developments. The company will this week unveil what it claims is the country's first zero-carbon house from a volume housebuilder.

Environmentalists and construction firms have been debating how to define zero carbon, with greens wanting each house to be zero carbon while the housebuilders argue that could be too expensive or impracticable. They want the flexibility to invest in offshore wind farms, for instance, as part of their commitment to renewable energy on their developments.

The GBC report rules that out, but does say some district heating schemes could be allowed or housebuilders could, in certain circumstances, pay into a community energy pot to fund local projects.

GBC chief executive Paul King said: "The government's level of ambition is spot on and should be supported 100%. This is not about dumbing down or abandoning the concept of zero carbon. This is about ensuring the same high level of carbon savings, but allowing developers more flexibility."

He stressed that near-site schemes could be approved but only if there was proof that the project was a genuine addition to the country's renewable-energy provision, and that the energy would be used to power that specific development. Failing that, the developer could pay into a community fund that would ensure equal or greater net carbon savings through new installations.

"The price of paying into the fund should be set at a margin above the cost of community-scale solutions so as to clearly incentivise the installation of on-site or local measures first," says the report.

The report, which will feed into the government's consultation on the definition of zero-carbon homes this year, is likely to be approved as it has been agreed by a range of different interests. Clare said: "The value of this report is reflected in the high degree of consensus reached by many different stakeholders."

WWF, the charity that has been a key driver behind the government's zero-carbon homes initiative, said the 2016 target was "eminently achievable".

Simon McWhirter, WWF's homes campaign manager, said: "WWF is optimistic that the findings from the Task Group will dispel confusion over the definition of zero carbon, investing more developers with the confidence to build to the very highest levels of sustainability. We hope this will help deliver practical zero-carbon homes well ahead of the 2016 deadlines."

Zero-carbon homes will be so well insulated they will require very little heating. They would have appliances consuming minimum electricity to be provided by installations such as solar photovoltaic panels or combined heat and power (CHP) plants. The report's definitions will allow for a single CHP plant to power several adjacent homes.

Original article here.

Labels: Barratt Developments, Green housing, UK GBC, WWF, zero carbon housing

More people want house prices to fall than to rise, BBC research has found.

That is the surprise finding of the first poll to test the assumption that house price falls are unpopular and therefore politically damaging.

Barely a fifth of people want house prices to rise - fewer than the number of people who want them to fall.

The poll of 1,005 people, commissioned by the BBC, found that only 22% said they wanted prices to go up while 28% said they wanted house prices to fall.

The poll, carried out by ICM, canvassed people over a three-day period from 25 to 27 April.

'Crashproof'

Nearly half of the people who responded, or 46%, said they wanted them to stay the same. The findings cast doubt on whether the political and economic damage done by falling prices is as serious as has been feared.

The poll was commissioned after makers of the BBC2 TV series The Truth About Property came across a surprisingly large number of people who wanted house prices to drop.

The first part of the series investigates the extent to which Britain's homeowners are "crashproof" - meaning they could withstand or even benefit from price falls.

What people in Cambridge think about house prices
Price falls bring economic benefits not just to first-time buyers but to any homeowner who wants to trade up to a larger or more valuable property.

The price of the place they are selling may fall. But, all else being equal, the more valuable property they want to buy will fall by a larger amount - meaning they have to borrow less to "climb" the property ladder.

Confidence knocked?

Economists are concerned that if prices fall too quickly it may knock consumer confidence, already at its lowest for 15 years, leading to reduced spending that could worsen the current economic slowdown.

But another finding for the programme questions whether it is house price falls that have damaged consumer confidence - as opposed to other factors such as food, fuel and mortgage payments.

Respondents were asked if a fall in house prices of more than 10% would make them more likely to cut back on household spending such as clothes, leisure and groceries.

More than 60% of people said it would either make no difference or would make them likely to spend more.

Only a minority - 38% - said it would make them more likely to cut back.

Nearly a third of homeowners have no mortgage on their homes - meaning no risk of negative equity.

And the programme reveals to what extent house prices would have to fall to put the average borrower in negative equity.

The Truth About Property is broadcast on Monday, 12 May and Tuesday, 13 May at 2000 on BBC Two.

For more info see the original BBC article.

Labels: Andrew Verity, House market, House prices survey, ICM, The Truth about Property

The Truth about Property is back for a second series and aims to make sense of the housing market turmoil. In this series presenters Andrew Verity and Jenny Scott travel around the UK to hear how households are coping.

Are you crash proof?

The ubiquitous credit crunch has led to a rough ride for home owners in recent months, causing higher mortgage costs and in some cases, negative equity and repossession.

In the first programme Andrew and Jenny find out how homeowners would cope in the event of a major property crash.

Andrew meets the Sawbridge family in Sheffield who are struggling to pay the mortgage and keep a roof over their heads.

While Jenny meets a property investor who is sure there is money to be made even when times are hard.

A solid investment?

In the second programme Andrew and Jenny find out how much we all invest in our houses and ask, is property a solid investment?

Andrew travels from John O'Groats to Lands End meeting people who face property dilemmas.

These include Tina and Simon who are first-time buyers and have just bought a home in Newton Aycliffe. The trouble is, falling prices have turned their dream into a potential trap. Now Tina wishes they had not bought.

Andrew also meets those who have found a creative solution to tough investment decisions such as Robin and Nicky who have invested in eco features. They believe a greener home will be easier to sell. Until then, they will enjoy lower utility bills.

Meanwhile Jenny jet sets with the property players.

Andreas Panayiotou used to work in his mum's laundrette. He bought his first property on Chapel Market in London 14 years ago. Today he owns assets in excess of half a billion pounds.

Andreas predicted the housing market slump and sold property worth £700m at the market peak. How did he know when to sell? And how far does he think property will fall?

Jenny also visits one of the most exclusive places to live in the world. Here an air of status has put a premium on prices. But how solid is an investment that is built partly on aspiration?

The Truth about Property will be broadcast on BBC Two on Monday 12 and Tuesday 13 May at 2000 BST

More details at BBC Business news.

Labels: BBC, Construction, Housing market, The Truth about Property

E.ON, one of Britain's big six energy suppliers, is teaming up with the University of Nottingham to build a replica 1930s house which will be used to test technologies aimed at improving the energy performance of Britain's ageing housing stock.

The three-bedroomed semi-detached house, on the university's "Green Close", will replicate what the partners describe as "many of the ageing and energy inefficient domestic properties" in the UK.

The government has set a target for new houses to be zero carbon by 2016 but industry experts acknowledge big efforts will be needed to improve the energy performance of the existing housing stock.

"Homes are big contributors to the causes of climate change as they account for almost a third of the carbon dioxide emitted in the UK," said E.ON's head of research and development, Dave Clarke. "Even with the government's target for all homes to be zero carbon from 2016, we'll need to retro-fit low carbon measures to existing homes in order to significantly reduce our carbon emissions."

The house will use low-carbon technology to generate and manage energy within the house and will have an extension designed to make the maximum use of solar panels.

Students will live in the house which is one of six being built on the campus.

"It will be lived in. We want to show the real savings, to get real data, from real people," said Dr Mark Gillott, research and project manager for creative homes at the university.

Gillott said that more than 21m current homes - about 86% of the total - will still be in use in 2050.

"It's vitally important that we identify and research technologies that are aimed at reducing the energy consumption associated with existing homes," he said.

Original article from Guardian Business.

Labels: energy efficiency, EON, Green Close, Green housing, Nottingham University

So the sky did not fall in. While the Chicken Littles of the world economy, led by Gordon Brown, George Soros and Warren Buffett, may still repeat mechanically the IMF’s surprising judgment that the world - especially America - faces its worst financial crisis since the 1930s, their hearts are no longer in it. Mr Brown, after last week’s election woe, can no longer blame the world economy for his political failure. Mr Buffett, having speculated against the dollar for years and declared that credit derivatives are financial weapons of mass destruction, has finally begun to find attractive opportunities to invest his money and told his shareholders last week that the worst of the credit crisis was probably over. Mr Soros, in his forthcoming book, The New Paradigm for Financial Markets, states unequivocally: “We are in the midst of a financial crisis the likes of which has not been seen since the Great Depression.” But after making $3 billion for Quantum Endowment Fund by anticipating last year’s bear markets, he is now hedging his bets, as is only to be expected from the world’s most successful hedge fund manager. “I may well be proven wrong,” he told The New York Times last week, adding that he might yet again turn out to be “the boy who cried wolf”.

The main explanation for all this revisionism is simply the change in facts. The near-unanimity of a few weeks ago that the US was sinking into a deep, prolonged recession has been dispelled by recent data on jobs, GDP, business confidence, industrial orders and consumer spending – all telling a consistent story that although the US economy weakened abruptly last autumn, it is not nearly as weak as at the start of previous recessions, and that there have been no signs of further deterioration since February in the key economic variables apart from house prices.

Moreover, the time of greatest risk of a US recession is almost past, since tax rebates worth more than 1 per cent of disposable income will start landing in US taxpayers’ bank accounts from this week, almost guaranteeing that consumer spending will pick up, at least temporarily, in the year’s second half. And just as the stimulus to consumption from tax cuts runs out, benefits of the Fed’s big cuts in interest rates should start to be felt fully in the first few months of 2009. So, it is increasingly likely that the US economy will not experience even a minor recession, at least as defined in the official statistics, as a result of the credit crunch last year.

Even more important than the relatively benign statistics is the news from the financial markets. Signs that the worst of the banking crisis may be over appeared to be confirmed by rallies in financial markets worldwide last week. Financial markets’ better mood is partly related to stabilisation in US economic statistics. But mainly it is a consequence of radical steps by governments and central banks all over the world since it became clear that private financial markets would not resolve the credit crunch.

As a result of these government interventions, culminating in the Bear Stearns rescue and nationalisation of Northern Rock, one financial market after another has started to return to something nearing normality. Straight after the Bear rescue, there was a narrowing of credit spreads on top-quality securities such as government-backed mortgages in the US. Next, two weeks after liquidity returned to credit markets following the Bear rescue, the yield on US Treasury bonds stopped collapsing and reversed, implying that markets no longer saw need for panic cuts in US interest. In turn, the steepening of the US yield curve that followed the return of more normal conditions to the bond market helped to put a floor under the dollar two weeks ago. Finally – though this is still a more tentative conclusion - dwindling fears of a freefall in the dollar seemed to take some of the wind out of speculation in commodities and oil.

Of course, it is impossible to be sure of the sustainability of improvement in the four markets that have been causing all the trouble - credit, bonds, currencies and commodities. But what seems fairly clear is that the real economy of jobs, profits, investment and consumer spending in America has so far suffered almost entirely as a direct result of weaker housebuilding and construction employment – and not in response to the negative wealth effects and bank-credit contractions in the nightmare scenarios of Wall Street analysts.

To pessimists, this means that the worst is still to come, since the real consumer reaction to falling housing wealth and bank deleveraging has not even started. An alternative view more consistent with economic theory and historic experience was suggested by the Bank of England’s Stability Report last week: “Credit markets are likely to overstate significantly the losses that will ultimately be felt by the financial system and the economy as a whole . . . They will exaggerate to an even greater extent the potential damage to the real economy.”

As noted in that report, the pricing of many bonds and credit derivatives in financial markets already assumes bigger losses from US sub-prime mortgages and other dubious assets than anything implied by plausible worst-case scenarios. This is true of highest-quality credits, with AAA and AA ratings, whose unexpected collapse has done the greatest damage to bank balance sheets. The Bank’s sums suggest that the highest-quality mortgage-backed bonds are now undervalued by 25 per cent (see chart). It now seems that, contrary to the Chicken Little rantings of many analysts in the City and Wall Street, these bonds face almost no risk of serious defaults even in the event of far bigger falls in US housing prices than any that have happened so far.

Indeed, the Bank’s calculations suggest that present pricing of mortgage-related bonds in financial markets has probably overstated the future losses on US sub-prime lending by about double.

None of this means that the credit crunch has been a storm in a teacup, as I originally thought. Changing attitudes to borrowing and lending will have a dramatic impact on the world economy, reducing long-term growth in consumption in economies that have been driven by powerful housing and mortgage cycles, including Britain, Spain and France. As Mr Soros says in his book, global growth can no longer rely on these economies and must depend on consumption and infrastructure investment in China, India and other emerging markets. These are momentous changes, and while they are quite far advanced in America, they have hardly started in Britain and Europe. But if economic news continues to deteriorate for a while - as it almost certainly will in the UK – investors and business should realise that the really important story in the world economy today is not the threat of a sudden collapse in the financial system, but a gradual long-term adjustment in the world economy in favour of emerging markets. This may at times be an uncomfortable process – but the sky will not fall in.

This is Anatole Kaletsky's Times Column for this week.

Labels: Anatole Kaletsky, credit crunch, global economy analysis, Gordon Brown, Warren Buffett

UK interest rates have been held at 5% as the Bank of England decided to focus on inflation risks, despite signs that the economy is slowing.

The rate freeze had been expected, although many analysts now predict that rates will be cut to 4.75% in June.

The decision came despite a flurry of downbeat data which added to worries about the state of the UK economy.

However, rising fuel and food prices means that inflation is ahead of the government's target.

'Recession risk'

"The latest data shows the economy is slowing, albeit only gradually, and at the same time inflationary pressures continue to mount," said Ian McCafferty, chief economic adviser to the CBI business group.

"The Bank faced a difficult decision, but it is no surprise that rates were kept on hold this month."

Meanwhile the body representing Britain's manufacturers, the EEF, said that the decision to hold rates was only delaying the inevitable cuts.

"The economy has been through a series of shocks since the credit crisis hit last summer and the Bank has been right so far in responding with a measured approach on rates," said the EEF's chief economist, Steve Radley.

The moment the rates decision was announced

"However, despite concerns on inflation, further cuts to interest rates are needed to prevent the economy from drifting towards recession."

The British Chambers of Commerce (BCC) argued that a rate cut would have underpinned business and consumer confidence and helped limit the potential damage to the economy.

"This decision was a mistake given the serious threats to economic growth," said BCC adviser David Kern.

Roger Bootle, economic adviser to Deloitte, said that by leaving the rate on hold, the Bank's Monetary Policy Committee (MPC) risked "presiding over the deepest and longest economic downturn since the recession of the early 1990s".

Mr Bootle predicted that rates would fall to 3.5%, or possibly lower, but that the moves would be "too late to prevent the economy from flirting with recession".

Speculation

Homeowners had been hoping for rate cut which - if it had been passed on by lenders - might have seen some people's mortgage payments reduced.

However, the credit crisis has made funding mortgages trickier for banks, and when interest rates were cut to 5% from 5.25% last month, not all lenders passed on the full reduction to borrowers, despite government pleas.

Negative manufacturing and service sector data released this week had led some to speculate that the Bank might decide to cut rates this month.

Office for National Statistics data showed that manufacturing output fell by 0.5% in March, the sharpest rate of decline in six months.

The figures followed data released earlier this week by the Chartered Institute for Purchasing and Supply which suggested that the UK services sector grew at its slowest rate in nearly five years in April.

The most recent available data showed that Consumer Prices Index inflation was 2.5% in March, holding steady from February, but well ahead of the government's 2% target.

On Wednesday, the British Retail Consortium said food prices in April were up 4.7% compared with a year ago, although falling prices of non-food items meant that shop prices overall were up by 1.2%.


Original article at BBC Business news.

Labels: credit crunch, Deloitte, UK Interest rates

With so much media speculation about a housing slump and the dreaded credit crunch, we thought it might be useful to do a feature with just plain simple facts. With that in mind here's an overview of the current state of play in the UK housing market:

Average Cost: £218,594
Detached: £342,895
Semi-detached: £197,833
Terraced: £174,208
Flat: £201,424
Change in last quarter: -1.65%
Change in last year: +3.7%
Sales: 167,050

Figures courtesy of the BBC.

For more data on the mortgage market, see the results of a new Times survey, published this week.

Labels: House market, market data, property prices