April 8, 2008 | posted by Chris Johnston in Mortgages |

House price movements can be seen as either a glass “half – full or half – empty” situation – it all depends on how you chose to view the figures.

The latest statistics from Halifax which show a fall of 2.5% in March, should, according to the Halifax, be viewed in the context of significant price rises last year and against the background of sound economic fundamentals which are supporting house prices.

These sound economic fundamentals are described by the Halifax as a strong labour market, low interest rates and a shortage of new houses. However, how robust is the labour market? With 62% of GDP accounted for by consumer spending and with rising inflation and with undoubtedly greater expenditure diverted to mortgage payments, the labour market is more fragile than it appears.

Are interest rates that low? The expectation is that the Bank base rate will be brought down to 5.0% or lower from its current rate of 5.25%, but this is high in comparison with the Eurozone rate of 3.75% and the US rate of 2.25%.

As to the shortage of new houses, this is not necessarily a brake on house price falls. The experience of Japan could be instructive. A boom in house prices in the 1980’s which ended in 1991 was followed by more than a decade of house price falls.

A different view of the economic fundamentals is that there is a crisis in banking, part of the financial services sector which accounts for around 10% of GDP, the Government is borrowing more than anticipated, sterling is falling, inflation is gathering pace and the high rate of consumer spending that has characterised the last ten years, has come to an end. In addition, consumer debt is at a dangerously high level.

With the economy so dependent of consumers borrowing to spend, the party is definitely over, and a new equilibrium will undoubtedly emerge in due time in which house prices assume a realistic valuation.