2011 the year that UK house prices finally fallPosted on 28 December 2010 with 19 comments from readers
Prices that defy the forces of economic gravity do not stay high forever. UK house prices must fall into this category as outrageously high if judged by historic income multiples and the bleak economic outlook.
Why have they stayed so high? The first rumbles of the financial crisis came in August 2007, more than three years ago. UK house prices dropped 10-20 per cent and then rallied back almost to their previous peak. For chartists that is a classic double-top and usually forewarns of a big correction back to price levels seen much earlier in the cycle.
Mortgage costs low
What has kept UK house prices up is obvious enough: the super-low mortgage rates of the financial crisis. But this is also the market’s most obvious achilles heel. For mortgage rates are set by global bond markets and these markets respond to debt levels and inflation.
Now the UK’s inflation rate is above three per cent while official interest rates are nearer to zero. Depositors are therefore losing money, not something that is likely to keep them satisfied for long. There is also the worry that mounting debts may never be repaid, and after Spain the UK has the highest debt-to-GDP ratio in the entire world.
That interest rates are going up is clear and this looks to be a global phenomenon for the year ahead. The Chinese raised their rates 0.25 per cent on Christmas Day hoping to bury this bad news in the seasonal merriment. Higher mortgage rates are not going to help new mortgage lending to improve from present record low levels.
Then you have to consider the demand side of the UK housing equation. VAT goes up on January 4th, a tax on consumption. There are massive public sector job cuts in progress. This is not an economic environment in which to buy an overpriced house. Renting is much more attractive because of the capital risk of buying, quite apart from the historically high deposit requirements.
Eventually such a market has to tip over. Somebody, somewhere will have to sell for whatever they can get. A rise in repossessions due to rising unemployment will also put houses onto the market at a discount.
New Year’s predictions of a two to five per cent fall in house prices in 2011 look wide of the mark. They just do not take into account likely further shocks to the UK economy vis-a-vis higher interest rates and unemployment, and not to do so makes them worthless and obviously wrong.
House prices tend to crash slowly and a 10-20 per cent annual correction over two to three years is only what is needed to bring prices back into their long-term relationship with income multiples. This has happened already in places as far flung as Florida and Dubai, and it will happen in the UK too.