Falling UK houseprices are essential for the economy

For the decade of 1997 to 2007, buying a house was a surefire way to get rich. Lots of people did it, older people had already bought in and saw bubble profits. The only losers were younger people without the wherewithal to join in and the poor who did not have the funds either.

However, for the last 2.5 years the story has changed. No one is now treating their house like a cash machine and Phil Spencer and his crew no longer sully the airwaves (his firm appropriately went bust last year).

People not using their houses like cash machines means there is less consumer spending in the economy. Also less activity in the market means the housebuilders are not doing so much construction, sparing up capacity in that sector. Then of course there are the poor volumes for those highly cherished estate agents.

Furthermore people are paying back their mortgages, this is profitable for the banks, but leads to an contraction of money supply, as money paid back is not replaced;  the banks are using this money to offset losses, not to re-lend on property where they are massively over-exposed.

So it would seem falling prices are not a good thing. This is what you can read across a range of economic commentators.

However, all of the above should be the normal state of affairs. Trying to have policies which move us back to igniting a property bubble would be insane as there was huge waste of valuable capital and easy profits for people do nothing; non productive speculation is not a long-term basis for a large economy like the UK. At least the City Speculation skims the world markets and not other UK citizens (they register as collateral damage only).

Already we have negative real interest rates, if we have these and still house prices fall it suggests they have a lot further to go. Managing this decline so that it does not distort the economy too much is crucial but falling prices are in many ways essential to a healthy economic recovery - it will show the economy re-balancing to a more stable state.

The takeaway here for me is that it means interest rates are going to stay low for a long time; if only to preent a housing crash that will occur if they are moved up swiftly. There will be a strong correlation with falling house prices and low interest rates (until rampant inflation gets our of control, but that is a story for another post).

UK House prices trend to fall

I am moving at the end of this week, so this latest bit of news is not good for those of us hoping to get rich out of living in our houses (this comment is aimed at winding up Mark Wadsworth).

Effecitvly the rate of mortgage lending, always low at this time of year, has fallen to an eight and a half year low. Always remember with an expanding population and more houses being built every year this is quite a reduction in real terms activity.

So what does this point to falling prices? Well logically it suggests there are not too many people either wealthy enough or confident enough to want to move house. Whilst this holds up supply of houses (and oddly, boost listed housebuilders who benefit from providing the supply trickle) and provides some temprorary suport to prices; long-term it suggests the market is still too high. Last year's recovery trend is running out of steam.

The saving grace that will stop another 20% correction is the low interest rate environment combined with 3.5% CPI inflation. This means that saving is not for anyone, as I have blogged recently and so investing in housing, althought illiquid, has some appeal. That, plus a possible fall in Sterling, makes it hard to predict where house prices will end up in nominal terms this year, in real terms I expect a 10% drop.

Where is the recovery though from the recession? Business seems to be picking up to a sustained level, but as these figures show, there is no real growth, just bumping along the bottom.

House prices uncertainty

The Telegraph had a story about homeowners dropping their prices. A figure of £5,000 off the average asking price was used.

Asking prices were dropped by an average of 2.2 per cent from July to August to £222,762 – the biggest slump this year – as sellers were forced to cut their prices amid the housing slump.
The monthly Rightmove house price report blamed lenders for boosting their profits by raising their mortgage rates but said the figures also showed the housing market was experiencing its traditional summer lull.

Another estate agent representative on the radio made the ever valid point that house prices are less effected by supply as by the availability of credit.
At the moment home sales are falling to people who have sold their own home themselves, those able to borrow from relatives and those with a £20,000- £50,000 deposit in the bank. These are finite buyers. UK savers do not have those kinds of reserves.

HIPS are contributing to the problem by taking the water testers out of the market. At £500 for a basic cost to see if your house isn't worth what you thought it wasn't, only the committed to sell will market their properties.

But there continues to be a shortage of properties for sale, with 82,700 homes put on the market during the month, 23 per cent fewer than in August last year when there was already a supply shortage.
It should be noted that the forecast is for 100,000 new build homes only for the whole year.

Just a few weeks ago there was talk of rises in 2009

Homes 'may rise in value in 2009'

The Telegraph at the time were much less trusting of the stats that led some people to predict house price rises by the end of this year.

UK house prices: has the great recovery started?

It does look like the further 10% fall this year and another 10% next year may be the correct forecast after all.

Bugger!

Undervalued houses in the UK?

One of Mervyn King's best phrases was:

"House prices are a matter of opinion,; debt is real."

Today is not April Fool's but this story sure is. Apparently poor estate agents are complaining that valuers are being mean and undervaluing houses; and this is dampening the market.

You would have thought that, just perhaps, having a realistic valuation would give a buyer and a bank confidence. Nor should it wreck the market, but encourage sensible buying and selling.

Perhaps commission hungry estate agents would want prices to be higher? This just shows their business illiteracy. More sales as cheaper prices would make them more than fewer sales at bigger prices.

Ho Hum. UK house prices have another 20% to fall at least, subject to the potential sudden effects of Quantitative Easing. I think we will be back heading downwards long before the election.