UK House Prices – How Low Will they go?

During my Christmas I tried to forecast house price movements – I reckoned they would fall a further 30% from the level of November 2008 to around £115,000, or just over 3 times earnings. This was based on:-

 

         Looking at both the Nationwide and Halifax indexes, looking at the long-term trends.  

         Assuming the current slump will be as deep as in the mid-nineties. That is, it will bottom out at just over 3 times earnings.

 

This is published straight after this posting.

 

Since then I have become more pessimistic. Before you dismiss this as the ramblings of a dour protestant  beancounter with a background in the dismal science, please hear me out.

 

  1. Today the government took over bad debts of the Dunfermline Building Society. Maybe only £600m of liabilities this time, compared with around £500bn from the banks. However, it is indicative of a government that does not know when to stop.

 

  1. Interest rates will have to rise sharply in the medium term (18 to 48 months), to enable the government to cover the huge borrowings, whilst competing for funds against other countries. We are heading for budget deficits well in excess of 10% of GBP at the same time as other economies are heading into deep recession. Furthemore, there will be no increase in

 

  1. The government appears to be hell bent on borrowing more, and not saying “we cannot afford it!”. For instance, the Teacher’s Unions demanding a 10% pay rise. This is despite the warnings from the Governor of the Bank of England that we cannot afford more.

 

  1.  Taxes will have to rise substantially to cut government borrowings. Cutting government spending, which would mean cutting public sector jobs and pay, is not politically feasible for either Labour or the Conservatives. This will cut available income for borrowing. When we last emerged from a housing slump in around 1997 to 1999, taxes has been falling for a while.

 

  1. Regulation of the financial system will increase, as will the capital ratios. In 1997 regulation was sidelined to box-ticking, and capital ratios were decreasing.

 

This is despite the Bank of England saying that mortgage approvals up by 19% last month (they always do at this time of year – but this is from a really low base) or the rate of decrease is the lowest for a number of months (ditto).

We have yet to see repossessions peak and unemployment still has another million to go.

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