2009 "Recession to Recovery"

By Joe McTaggart
December 2009

2009 "Recession to Recovery"

The start of 2009 was not one filled with hope. The headlines were nothing but doom and gloom following a year where the global financial system went into melt down and the credit markets froze as if they had been thrown back to the ice age. With the Royal Bank of Scotland announcing the biggest recorded loss in UK corporate history at £24.1billion, things looked like they would get worse.

In this our last edition of the year we review 2009 and ask “Was it as bad as some predicted?” and try to predict what will happen in 2010 for UK property. In addition we get the inside track on the UK mortgage market and find out how you can boost your investment in residential property by up to 40%. Finally we take a look at how you could create liquidity to invest from potentially illiquid assets.

Economic overview
The FTSE 100 started at 4,561 down 28% from its high in May 2008. It proceeded to fall by another 23% to 3,512 to levels not seen since March 2003, the start of the Iraq war. The Bank of England (BoE) took unprecedented steps of reducing the base rate to 0.5% the lowest in its 315 year history. This was followed up with a radical boost to the money supply with a £190 billion quantitative easing program.

Did it work?
If the performance of the FTSE 100 is to go by (48% up on the year low, over 5,200 points) we would say the green shoots have firmly taken root and the economic outlook is improving.

Although unemployment has continued to rise through 2009, topping 2.49 million the most recent figures from the Office of National statistics (ONS) show the number of people claiming jobless benefits fell by 6,300 to 1.63 million last month.

The fall was unexpected with most City economists predicting a rise of 12,500. This first fall since February 2008, adds to signs the economy is emerging from its deepest recession in at least three decades. While the UK is still technically in recession it is worthy tonote that at 7.9%, the U.K. jobless rate is below the 10% in the U.S. and the 9.8% euro-region average.

Manufacturing grew during 2009 and although there was slight fall in November 51.8 compared to the revised figure of 53.4 in October. Total new orders rose for the fifth successive month and new export business increased at the fastest pace for two years. For those not familiar with this indicator under 50 equals contraction and plus 50 growth.

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said: “After surviving one of the deepest downturns in recent memory, the manufacturing sector has slowly but surely started to grow again and conditions are looking decidedly less sickly than at the start of the year.”

Property Review
Confidence in the UK property market was a heavy casualty of the economic meltdown and predictions for 2009 were gloomy at best. With most commentators predicting falls, Capital Economics and houseprice.co.uk went further, stating that the market would drop by another 15-20%.

Thankfully they were both very wrong and the market surprised most (not us) and staged a recovery. According to the Land Registry the UK market increased by 4.4% with London and the South East outperforming the market rising 7% and 7.9% respectively.

Initial demand was driven by overseas investors taking advantage of property bargains and sterling’s weakness to magnify their gains. With yields sitting between 7-12% cash buyers entered the market as they looked to better the returns given on deposit.

More positive news came from the Council of Mortgage Lenders (CML). They initially predicated 75,000 repossessions in 2009 however went on to revise down this number twice, 65,000 in June and then 48,000 in November. This was done in recognition of lenderforbearance, government measures and the beneficial effect of continuing low interest rates which had helped most borrowers facing difficulty to keep their homes.

Supply
UK house builders spent the first quarter of the year cutting costs and generating cash in an attempt to manage the weight of debt on their balance sheets. In addition to selling stock units at large discounts, they also suspended the build out of existing sites and sold land.

This has had the net effect of reducing the amount of available new build in the market especially London. With demand improving, we are starting to see developers standing firm on their pricing or even increasing prices. We predict buyers will soon only be able to buy off plan from next year.

City confidence in house builders has improved over 2009. A recent note from Citigroup stated that the sector has been affected by what it called a 'disproportionate double dip discount', with shares having fallen 20% in the last three months on fears of an expected downturn in house prices in 2010.

The analyst went on to argue that underlying fundamentals have continued to improve, as seen in house prices, mortgage applications, housing transactions and consumer confidence. In addition the sector could withstand some deflation in prices next year without having to mark down their assets once again.

How will the property market perform in 2010?
The likes of Capital Economics are once again predicting the market to fall, but this time by 10%. This year the “Negative Choir” has fewer members and there is now a growing consensus that the negative sentiment towards the housing market has been overdone.

But before we hang our hat on a number it’s important to take a look at some of the risks factors that could derail a sustained recovery.

1. Rising unemployment: An obvious threat but recent data from the ONS showed the number claiming unemployment falling for the first time since February 2008. Figures to be released this week are set to show that recession in the UK all but ended in the third quarter of the year. With the economy now in growth mode, all be it slowly, unemployment should continue to fall.

2. Rising interest rates: Current rates have helped to stablise the housing market and stopped a flood of repossessions. However the economy is still fragile and requires support. As such we do not see rates rising in the short term. In the medium term any rises will be small & gradual.

3. Lack of finance: The outlook is positive with mortgage rates falling, Loan to values (LTV) increasing and lenders re-entering the market. (See the mortgage overview on page 3 for full overview on the mortgage market)

4. A flood of supply: Supply has been a key factor in the recovery of the property market. Many expected a flood of repossessions to hit the market and put further pressure on already reduced prices. This did not happen due to government intervention and low interest rates. Coupled with the lack of new build coming to market over the next 12-18 months, we believe the supply will continue to be constrained. There may be some regional variations, but do not see oversupply destabilising the market.

2010 Prediction
We believe there will be a slight softening during Q1/2 which will either level prices or lead to a small respite in price growth. The market should pick up toward the end of the year leaving an overall increase of between 5-7%.

As we end another year and another decade we should point out that historically the UK property market has doubled every 7-10 years since the end of the Second World War. Despite the property crash of 2008/09, it has still increased by 109% during the last decade and no doubt will continue to do so in the next.