2011 Shaping up to be a Hard Twelve Months

Mark Posniak - 28 January 2011

January wasn't quite the start to 2011 that Merv the Swerve would have wished for. In fact, you could say it was the polar opposite of what he would have liked to have seen coming out of the economy.

Mid-month we had rising inflation of 3.7% and rising unemployment and then earlier this week we had the bombshell that the economy actually contracted by 0.5% during Q4. It once again made a nonsense of economists predictions, which were by and large growth of 0.4% in the final quarter of last year. Only a near-percentage point out, then. 

In the second half of 2007 the talk on people's lips was the dreaded R word. Now it's the even more ominous S word: stagflation. Prices are rising but the economy is flagging and that is putting Mervyn and his fellow MPC members in quite a pickle.

Raise rates to control inflation and they risk holing the economy under the waterline. Leave rates at their current level to keep the economy afloat and inflation could soar in the short- to medium-term, with equally damaging effects.

All this will naturally have a major effect on the performance of the property market in the months and potentially years ahead. The property market thrives on sentiment and sentiment, well, let's just say it isn't that great right now. If more homes are repossessed, as jobs are lost and people struggle with rising living costs, prices will come under considerable pressure, especially at the lower end of the market.

And then there is the small matter of mortgage finance. It is still very difficult to secure loans at higher LTVs, and until the lower end of the property market starts moving again, the sector as a whole will languish.

There are certainly more reasons to believe the property market will decline over the course of 2011 than rise. It's even possible that areas where there is an excess of undifferentiated properties could see falls in the large single figures.

Saying that, there are always going to be pockets of resistance, sought-after areas where property can still sell at or above guide given strong demand. In fact, the signs are that we could see the formation of a two-tier market over the next 12 months. 

On a positive note, a tough property market will afford numerous opportunities to professional property investors and landlords. Reduced demand, lower prices and more repos offer considerable ROI for cash rich investors who are brave enough to step in when others are raising the drawbridge.