Enquiries Up, Lending Up, Terrorism Up

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27 March 2009

Terrorism Strikes in the Heart of the Grange

The attack by 'Bank Bosses Are Criminals' (descriptive of their view, if not a catchy name for a terrorist organisation) may have physically manifested public anger but was clearly ill-conceived, and not for the obvious reasons of its illegality, delinquent nature or the fact that we hate to see good property damaged.

The actions of a few bankers, be they criminal or not, have incurred costs for the tax payer, as will the actions of 'Bank Bosses Are Criminals' as they divert police resources into protection, forensic investigation, paperwork and so on; an irony that may be missed by the perpetrators. If they want to be taken seriously in future maybe they should adhear to Morningside etiquette and write a strongly worded letter.

So is inflation going up or down?

Well, down is the answer, but while the Retail Price Index (RPI) dropped from 0.3% to a flat 0% in February, narrowly avoiding the deflation that many economists were predicting, most observers were blindsided by an increase in the Consumer Price Index (CPI) from 3% to 3.2%. The reason for this disparity is due to the difference between how the two indices are compiled; in short, RPI includes housing costs and CPI does not. This means that different elements of the 'shopping baskets' are affected by different economic influences.

The weak pound has driven up the cost of some imported goods, such as food and fuels, and this has driven up CPI this month. The inclusion of housing costs in the RPI has been influenced by currently low interest rates which have suppressed housing cost i.e. mortgage repayments, leading to a differential between the two.

So what is the outlook and what does this mean?

With many investments, benefits, pensions and pay awards linked to RPI, deflation will have a real life impact on many areas of the economy and society. There is also a risk that if CPI remains well above a deflationary RPI then costs will be rising as income is dropping, further squeezing already stretched finances. As an example, a retiree who owns their property outright with a RPI linked pension annuity may not benefit from lower mortgage payments but will suffer from higher costs on fuel and light and lower RPI linked payments. While this is a concerning scenario, many economists expect both RPI and CPI to become deflationary in the coming months, however, this leads to the next challenge of deflation.

While we would all like to pay less for the things we buy, the problem with deflation is the impact it has on the wider economy. As we have seen in the housing market, falling prices means buyers postpone buying in anticipation of further falls, when prices fall buyers then postpone further. As highlighted in a new build context last week, this can causes problems in terms of production, supply and employment. With less demand comes less production and less employment which is bad news for the wider economy.

Beyond the obvious symbiosis of the economy and housing market, RPI is also used as a measure in many property contracts. Using annual rental uplifts in lease agreements as an example, we can see that while low RPI will drive down annual uplifts the fact that many are capped at a minimum threshold means that during a period of low or negative inflationary pressure they can provide comparative value and protection.

The uncertainty of the economic outlook, the potential impact of Quantitative Easing and the dual problems of deflation and then inflation make finding a safe harbour in this financial storm difficult. This has lead many back to the security of bricks and mortar, especially, if as some commentator believe, house price retreat is slowing and the market is finding its lower plateau. 

A Review of the Indices

As whispers and hopes of improving market activity bubble away; where are we now in terms of the indices?

While disagreeing on the actual average house price, both the HBOS and Nationwide do agree that the market has retreated circa 20% from peak levels. This represents a real terms drop in value of £39k on the average property, a figure which is £2k above the national average annual wage.

This price reduction has had a significant impact on affordability reducing the average wage to price ratio from 5.84 at the peak, down to 4.42, according to the HBOS Index. This equates to levels of affordability last seen in 2002.

In the first time buyer (FTB) market in Scotland, where property has on the whole remained more affordable than in the rest of the UK, affordability has only retreated back to 2006 levels.  This again is characteristic of the challenges facing the FTB within the wider market context.

What we have also seen at the start of the year is an increase in consumer confidence for major purchases such as houses and cars according to the Nationwide Consumer Confidence Index. Those thinking that it is a bad time to buy a major items is down to 41% from 68% at its peak in August 2008, while the proportion thinking it is a good time to buy is up to 38%, from a low of 14%. While there is an overall negative balance there has been a clear improvement in outlook during the beginning of 2009 as many buyers perceive real value to be returning to the market.

In terms of lending there is also positive news from the British Bankers' Association who have announced a month-on-month increase of 17% for lending for house purchase in February and a 58% increase from the nadir in November 2008. It should be noted that lending is still at an historically low level, down 60% year on year based on the Council of Mortgage Lenders figures.

...but what will be available?

Overall, we have seen encouraging signs filtering through a number of indices which complements much anecdotal market evidence and our own experience and research. Organisations like the National Association of Estate Agents have suggested that sales levels are now reaching a plateau as volumes return to year-on-year levels and stay constant month-on-month.

We have seen increased signs of activity improve week-on-week as the year has progressed. Part of this may be attributable to the realisation that with more sellers opting out of the market there is a diminishing availability of desirable property. Our monitoring of the Edinburgh and Lothians' market has seen a 20% drop in overall supply from already suppressed levels in October 2008. This has meant that whilst the theoretic average house might still have further price falls to come, some buyers feel that the actual house they want to buy may not be available when the statistical market nadir is reached and therefore action sooner rather than later provides the best real world opportunity.

Therefore, whilst the slowing and plateau of many market statistics, which have been in freefall, may be promising for those looking to sell, and like us, those involved in the property industry, for buyers it may signal the end of un-opposed negotiation for quality property.

Edinburgh News

It has been another mixed week for Edinburgh. On the positive side there seems to be some resolution to the ongoing trams dispute, for the moment, but on the down side the developers Mountgrange have been taken into administration casting doubt on the future of the Caltongate Project. While the controversial scheme has had many exponents and detractors, what is important for Edinburgh is that it remains a city where inward investment and development occurs to support its status world class city.

A Week of Tensions

It has been a week of tensions; domestically Gordon and Mervyn have been reported as disagreeing on the stimulus package in place, with Mervyn saying he may withhold using the full £75bn available. This has been attributed as contributing to the first gilt auction failure since 1995, as reported in The Telegraph. However, Gordon from New York has stated that there is in fact 'consensus, not disagreement'.

On a more international front, and perhaps slightly beyond the remit of this humble market summary, China has been calling for a move from the Dollar as the underpinning of international finance. Whilst unlikely and not a new idea, mused by Russia and promoted by pre-war Iraq for oil trading, it is illustrative both of the uncertainty and potential for change that this financial episode has engendered and how changes to existing conventions may alter market operations, be it legislation from local government or global market economics.

Contact Us

If you have any questions, would like any further information regarding the above content or would like to discuss how the Rettie & Co. Consultancy & Research Team can help your business, please do not hesitate to contact:

Andrew Meehan
Researcher
t: 0131 624 9051
e: andrew@rettie.co.uk

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