Property woes..

[uncle tom]

For several years now I have been a bit of a bear regarding the property market.

In the late eighties, I saw the last slump coming, and acted accordingly, my forecast being much ridiculed at the time.

The current boom became unsustainable about six years ago, and for the last four my prognosis has been for a crash, followed by a rebound, rather a slump (as happened in the nineties).

This is the text of a post I placed on a house price site, countering the three most common arguments levelled against the prospect of a severe price correction:

House prices will fall, because for several years now, house price inflation has been fuelled by.. - rising house prices.

It's a classic bubble, whose progress has been all too plain to see.

It didn't require great powers of genius or clairvoyance to see what was happening - just basic maths, and an understanding of the practical consequences of human greed.

Yet despite the evidence that the party is over, we still have people trying to deny the obvious. Here are the three standard arguments that need to be de-bunked:

1) 'The market will remain strong because the economic fundamentals are sound'

We currently have a huge trade deficit, and ultimately trade has to balance. However, there is no serious prospect of a manufacturing recovery without a substantial fall in the global value of sterling.

As most other developed countries have the same problem, it follows that the currencies of the developing world must rise dramatically against those of the developed world. This will tend to make commodities cheaper in the developing world, so propelling demand and, therefore, the price of those commodities.

This will further propel the sterling cost of both commodities and manufactured imported goods, making the trade balance worse in the short term, and forcing even greater sterling devaluation.

The consequences clearly point to inflation, high interest rates, and recession borne of reduced affordability.

At the same time, both the consumer and the government has become dependant on ever increasing debt. Even those who have kept their personal finances in trim are benefiting from the debt build of others.

The economic fundamentals are therefore a disaster area, and a severe economic depression looks hard to avoid.

2) 'Shortage of supply will support prices'

Aside from the likely exodus of recent migrants as the economy turns down, and the huge number of empty properties, a quick look at the ONS website reveals that the average number of people living under one roof is at its lowest level ever - does that imply a shortage?

Another facet to this argument is: 'the growing number of people living on their own' - has anyone stopped to work out how many school leavers will ever be able to afford a mortgage (at present prices) on a single income?

3) 'Affordability is better now than in the early 90's'

The widely quoted (Lombard) measure of affordability is based on those taking out a mortgage, while ignoring those priced out. With property speculators fleeing for the hills, it is clear that would-be first time buyers who in recent years have been priced out by speculators, now need to be priced back in.

The Lombard measure is a bit like studying the swimming skills of the nation, by looking closely at those who can already swim, and no-one else. The study then concludes that because few swimmers drown, we can cancel swimming lessons.

The affordability studies are also focused on first year numbers. In the early 90's, those who were out of their depth in year one knew that pay rises would throw them a life belt after a year or so, as inflation was much higher then. Now they slowly drown...

There is no clever way out of this mess. The speculators who have driven the bottom end of the market for the last few years have gone - their unsustainable need for house price inflation to greatly exceed wage inflation is no longer met, and the credit crunch is denying any that remain the necessary funds.

A substantial house price adjustment is inevitable, and the downturn looks set to trip the wider unsustainability of the economy

When faced with a depression, governments have to deal with high unemployment and often, civil unrest, with few tools at their disposal.

One proven remedy is to incentivise the construction industry, and get people building lots of houses!

Tom

[Alex Bridgeman]

One good thing that seems to be coming out of the current downturn in house prices is a large number of newly built but unsold single bedroom flats. Now that there are fewer people around interested in buy-to-let, we may see the price of these unsold units fall and become affordable to the first time buyer once more.

For my children's sake, I do hope so.

Incidentally, my own personal economic barometer is the amount of development going on in Central London. When it gets to the stage that virtually every road I walk down as I walk from Moorgate to Tower Hill has road works and new buildings being constructued, it is time for the economy to turn down sharply.

This happened summer last year...