Unless you have been living on Mars over the last few weeks, you will know that the trickle of predictions seen last year forecasting falls in house prices has turned to a raging torrent.
The question is whether these new property bears are right. If you are a regular reader of this newsletter you will know we have long taken a negative view on the UK housing market. It’s not just that we think prices will fall, we also think that at their current levels they are very dangerous. You would imagine, then, we would automatically join the bandwagon of those predicting falls.
Well, house prices might indeed fall. Just before Christmas, Capital Economics revised its estimate for house price falls in 2008 downwards from 3 to 5 per cent. More to the point, it also predicted falls of 8 per cent in 2009 and said “We believe, however, that the message from rental yields, the house price to earnings ratio and mortgage affordability is that the housing market is overvalued by roughly 25 per cent. If that is right, then over the next few years, there is certainly the potential for an early-1990s-style adjustment.”
In recent years the market has been propelled upwards by buy-to-let investors, with the first time buyer threatening to join the Dodo on the extinct list for a very long time.
House price growth has also been self-financing, with investors using the capital growth in their portfolio as a form of deposit for their next investments. Now, there are some who would say that a market that is growing in that way is by definition a bubble, and bubbles always burst.
But you do need to balance these negative sentiments with the extraordinary faith held by so many that house prices only ever go up. The property industry has done a magnificent marketing job in persuading investors that property investing is a long term game, that in this era when we worry about our pensions, property investment is the answer, and that even when house prices do dip, which they may do from time to time, it will only ever be a temporary phenomenon.
The industry, and indeed certain quarters of the press, seem determined to continue to talk the market up.
Just before Christmas, Stuart Law, chief executive, Assetz, was quoted in the Telegraph as saying, “There is a lot of speculation suggesting that a crisis in the property market is looming, and although much of this is based on unfounded claims and conjecture, the continued mutterings are running the risk of turning into a self-fulfilling prophecy.”
He added, “The danger is that people are now beginning to believe such spurious claims, offering a further knock to consumer and investor confidence.
While there is no denying that the rate of house price growth will continue to slow in 2008, this is the result of a widely-anticipated period of stabilisation, and is not the beginning of a housing market crash, as is being touted within the industry.”
Now note those words and phrases Mr Law used, “spurious claims” and “unfounded claims and conjecture.”
He then went on to repeat the oft-heard argument about a shortage of supply. It always strikes us as a tad odd when people say things like “housing crash, don’t believe the hype,” when the housing market has itself been subject to an extraordinary level of hype, pushing prices up, and up.
Take as an example the Daily Express.
Recently, the Nationwide released its latest data on the UK housing market. It has prices down 0.5 per cent in December, which followed a 0.8 per cent fall in November. Now some people might take comfort from the fact that the December fall was not as great as the November fall, but that would be plain daft, or so we thought. After all, November’s 0.8 per cent drop was the biggest monthly fall the Nationwide had recorded in 12 years.
Of course the annual rate is still positive because the falls in prices are only a recent phenomenon, and the annual equation that makes up the 12-monthly figures still contains a lot of price rises from the early part of the period.
But then at the end of last year, the Sunday Express showed us the error of our ways. “House prices rising again” it headlined, and went on to say, “Home owners are breathing a sigh of relief after new figures revealed house prices are rising again in many areas. A predicted slump in the housing market has not arisen, despite the credit crunch.”
The article went on, “Latest research by the building society Nationwide yesterday revealed prices nationally were up 4.8 per cent year on year.”
But this article probably illustrates the biggest single reason why house prices may not crash - contrary to what Mr Law from Assetz said, there is still plenty of hype talking prices up.
It seems to us, that with so much hype, with a kind of panic hardwired into British non-homeowners that they have got to jump on the bandwagon, it will take a very nasty shock indeed for prices to fall dramatically.
This attitude is incredibly damaging - rising house prices do not make the UK a stronger economy, they do not increase our ability to produce more goods and services. What they do achieve, however, is the redistribution of wealth, and lull home owners into a false sense of security that their future retirement is secure via their pension. They will suffer a nasty shock, in years to come, when baby boomers retire en masse, and either downsize, or release the equity tied up in their home and spend money that is not backed by supply, thus fuelling inflation.
So, it is possible that to avoid a house crash, all the government needs to do is release some gas. Lower interest rates, up spending.
Yesterday Gordon Brown, speaking on the Andrew Marr show, warned that 2008 will be a tough year, and, to paraphrase him slightly, said, “Judge me on how I handle the crisis.”
But then again, he also said, “I will be judged on whether we take the right long-term choices for the British economy.”
The right long-term choices for the UK, are to correct this debt-infused madness that is taking an increasing grip on the economy.
A madness that could spill over into pain this year, as 1.2 million property owners find their fixed rate mortgages have come to an end.
If the credit crunch finally comes to an end soon, and there were signs over Christmas that the action taken by central banks in December to pump money into the system was beginning to work, then some of the dire warnings that were becoming common currency before Christmas will not be fulfilled.
If central banks also slash interest rates this year, and there is a feeling that the UK rate could eventually fall to 4 per cent, then the combination of restored liquidity and low interest rates could lead to a new boom.
In the long term, such a boom will be a disaster, and our Gordon says he cares about the long term. But then Harold Wilson once said a week is a long time in politics, and if that is so, then presumably Gordon will have a slightly different idea of the long term than the rest of us. He may, for example, see the time of the next election as the long term.
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