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Urgent Stock Market Message

UK House Prices Bottom or Temporary Summer Bounce?

Housing-Market / UK Housing May 14, 2009 - 04:24 AM GMT

By: Nadeem_Walayat


Best Financial Markets Analysis ArticleUK House prices have now fallen by more than 22% from the peak and down 13-16% over the past 12 months with the most recent data across a series of house price indexes such as that of the local government & communities, Nationwide and even the Halifax suggestive of near term support for UK house prices as we move into the seasonally stronger summer months.

The unprecedented UK house prices drop of 22% to date has definitely sparked interest amongst prospective home buyers to venture out into the warm summer months after having held off from viewing / purchasing during the past 12 months. This new demand is reflected in data from estate agents who report a surge in the number of new buyers registering with their agencies to the highest numbers in 10 years. This is backed by Chartered Surveyors data (RICS) which show 70% of surveyors report a surge in new buyer inquiries.

Therefore the UK housing market is definitely seeing liquid buyers return to the market which 'should' be reflected in rising house prices during the summer months that undoubtedly will increasingly be taken by the mainstream press to conclude that the house prices have bottomed.

However the flaw in the analysis for those that will jump onto the bandwagon of a bottom in UK house prices is the fact that the UK economy continues to contract lower towards my forecast of -4.75% for 2009, with the Bank of England admitting yesterday that it is totally clueless as to what will happen next after having failed abysmally to manage the financial system and wider economy during the past 12 months, which has resulted in unemployment that looks set to continue rising to a break above 3,000,000 this year.


One of the key drivers of the housing bear market is housing affordability levels which remain at extremely high levels which implies we are perhaps just past the half way mark in terms of house price trend as the below graph illustrates.

Interest Rates

Yes, base interest rates have crashed to an unprecedented level of just 0.5%, however this is NOT translating into mortgage rates of anywhere near 0.5% with SVR's stubbornly remaining above 5% and many fixed deal offerings in the region of 4 to 5%. All of which is accompanied by ever tight lending requirements. On top of this we have the governments huge issuance of gilts this year well north of £220 billion that has resulted in the other unprecedented policy of Quantitative Easing aka Money printing to buy up the bonds the effect of which is inflationary as despite the short-term bounce in sterling it will put the British Pound under increasing pressure hence implies higher interest rates.

Mortgage Market

The tightness in the supply of mortgages is reflected in the data, that is at near 1/3rd the level of the recent bull market peaks.

Repossessions and Negative Equity

Whilst the number of repossessions is forecast to hit a high of 75,000 this year, matching the the early 1990's peak of 75,000, however this masks the impact of all of the government initiatives and bank arm twisting measures in an attempt to artificially keep people in their homes by a variety of means such as the "Mortgage Rescue Scheme" in the run up to the 2010 general election. This therefore means that reported repossessions data such as that from the Council of Mortgage Lenders (CML) will tend to under-report the true state of the impact of repossessions on the UK housing market as the reported repossession figures will mark but the tip of a much larger ice berg that could run to as much as a million home owners in arrears and helped to stay in their properties in one shape or another that will continue to impact negatively on the housing market price trend due to the supply of negative equity over hanging the market, that eagerly await a return to the housing boom to sell into.

UK House Prices Forecast

This therefore supports my recent in depth analysis which concluded that UK house prices could experience a technical summer bounce, however this bounce will not be sustained as once these new buyers have bought, the overwhelming bearish fundamentals will reassert themselves with the bear market resuming with a vengeance later in the year.

So yes, UK house prices will perhaps moderate towards a 2009 decline of -10% from the forecast of -16%, however the downtrend is expected to continue for many more years at a shallower pace as the housing market depression will see house prices drift towards the forecast for a peak to trough contraction of approx 38%.

By Nadeem Walayat

Copyright © 2005-09 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Kate Faulkner
14 May 09, 17:15
UK Housing Market Forecast

Dear Nadeem,

I'm fascinated to understand why you thought 'panic' would set in to the property market this year? I predicted that supply would start matching demand around April this year, which it has, but agree with you that the market isn't going to suddenly 'move forward', we can't begin to recover in housing until 90% good rate mortgages come back in. So my prediction is that this is a flurry and then we'll slow back down July/August, another flurry Sept/Oct and then slow again Nov/Dec. I've lots of property price predictions, so be keen to get together at some stage to compare methods!

14 May 09, 18:53
UK house prices
Hi Kate

The UK housing market entered the panic stage in April 2008 - UK House Prices Plunge Over the Cliff, as warned off on 10th Nov 2007 - Crash in UK House Prices Forecast for April 2008

The rate of decent in house prices after the new buyers are done will be determined by the rate of accent in unemployment which actually makes housing affordability worse as it does not factor into the X3.5 salary or even my own more sensitive affordability index.

A short-term oversold bounce could carry for several months.

15 May 09, 06:44
Just a thank you note

Just a quick acknowledgment to you Nadeem who helped a struggling first time buyer.

After being in rent for many years, I watched prices spirral out of control. Upon reading your reports over the last year, it gave me the insight to secure a mortgage tracker deal at 0.9 above base rate with a 10% deposit before the historical turn of events. As the market dried completely up, I was in a position to obtain a 25% reduction off an asking price. This has allowed me to obtain a home (which is all I wanted to do and not as a strict investment) and has put me in good stead for the future (to tackle the interest rate hikes)

Your market predictions helped me to see around the corner. Thank you.

Mark Foster
18 May 09, 11:36
Mortgage rates / First time buyers

As a first time buyer with just over a 10% deposit I have to agree with Kate's comments that I can't see the market moving forward until LTV and rates being offered on mortgages improve. Current fixed deals are 6% + and likely to go up over time, if the market will further decrease by another 20% there is no incentive to purchase. Nadeem - do you see a sweet spot on the horizon (2010/2011?) where affordability and loan deals come together?

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