New Project Armageddon study forecasts 30% fall in UK house prices

A sweeping analysis of the outlook for the UK economy from Tullett-Prebon entitled ‘Project Armageddon’ predicts a house price ’slump of at least 30 per cent that would take the (price/income) multiple down to three times’

The 64-page strategy insight from the blue-chip brokers concludes that the government has made a critical error in projecting the maintenance of high rates of economic growth while cutting government expenditure. This will severely undermine efforts to tackle the highest debt mountain of any country, something hidden by the way official data is presented.

House prices too high

‘Though annual average house prices have declined by 17 per cent since their 2007 peak, the ratio of prices to earnings is still 4.5, far higher than historic averages in the 3.2-3.5 range.

‘Property market participants are reporting subdued levels of activity, and this combines with the still-very-extended multiples to suggest that further sharp falls may be imminent. There are at least three further reasons to suppose property prices may be heading for a big fall.

‘First, net mortgage lending has virtually dried up, declining from £113 billion in 2006-07 to just £3 billion in 2010-11. Second, even the official forecasts concede that interest rates are likely to rise which will further undercut affordability. Third, it is clear real incomes are declining (due to inflation and wage freezes)’.

Sharp house price falls

The report concludes: ‘It seems highly implausible that the property/price earnings ratio can remain 40 per cent above its historic trend. One of the characteristics of of the unfolding downturn in the British economy is therefore likely to be a sharp fall in property prices’.

That is perhaps understating the case. The full report goes into great detail to explain just how massively indebted the UK economy has become. However, it does not actually fully explain what the armageddon scenario would be for the British economy apart from flagging up very important factors that seem to undermine the present government’s recovery scenario, like the impossibility of reviving GDP growth with 70 per cent of the economy laden with debt.

You do have to wonder what this armageddon scenario would really comprise – presumably a depression of sorts – and what that would mean in terms of house prices overshooting to the downside.