UK and US house prices heading downwards again

Average UK house prices are now 20 per cent off the peak reached in August 2007 and only four per cent above their lowest level in April 2009, according to Halifax, while property website Zillow has US house prices down three per cent in the first quarter of 2011.

In the US repossessed homes account for 30-40 per cent of actual sales transactions, exerting a downward leverage on prices. And the number of US mortgage payers with homes worth less than their debt is up from 22 to 28 per cent.

Foreclosure sales

Zillow commented: ‘Rising foreclosures and high negative equity rates make it almost certain that we won’t see a bottom in home values until 2012 or later.’ Forecasters Case-Shiller see a further 5-10 per cent downside to US house prices. Las Vegas is most affected and Washington and New York least.

UK forecasters are generally more optimistic because of tighter supply constraints. ArabianMoney has previously argued for a larger 10-20 per cent price correction in 2011 (click here).

But that forecast depends on interest rates. If global central banks can continue to manage the juggling act of maintaining bond market equilibrium with low interest rates then continued low interest rates would put a cushion under UK house prices.

However, this is a close call and nobody is suggesting that today’s super-low interest rates can continue forever. Therefore buying a house now with interest rates artificially supporting the valuation would look very foolish because a price correction just has to come when interest rates do go up.

Sterling crisis

What could force that to happen? Investors would have to pull their money out of the UK bond market because of a loss of confidence in sterling. With inflation currently way above interest rates it is surprising that this has not already happened because bond investors are losing money in real terms at the moment.

Therefore a UK economic recovery would work against house owners because if the economy was picking up money would move from bonds to stocks and interest rates would be forced higher to compete.

Home owners on both sides of the Atlantic look doomed to lose money on their houses for an extended period, and in the UK in particular a big fall in nomimal prices looks inevitable unless there is a massive inflation of consumer prices that would achieve the same thing in real terms.

Arabian  buyers driving up prices in the top areas ought to remember that buying sterling assets in a country that so obviously needs to devalue will be an expensive mistake in their own currency whatever happens to UK prices.