UK House Prices and GDP Growth Trends Analysis
Housing-Market / UK Housing Sep 03, 2010 - 12:33 AMBy: Nadeem_Walayat
Whilst many methods have been utilised for determining future housing market price trends such as average earnings, mortgage interest rates, currency valuations, real terms inflation adjusted valuations, comparison against other global housing markets and real disposable earnings, this analysis seeks to add real UK housing market analysis against UK GDP growth. The assumption here is that the value of assets should over the long-run increase in inline with a countries actual economic growth rate as measured by gross domestic product.
UK GDP Growth Forecast
The December 2009 forecast for UK GDP Growth from 2010-2015 was recently updated (UK Economy GDP Growth Forecast 2010 to 2015 ) which concluded in a revised growth expectation for 2011 down from 2.3% to 1.3%. Forecasts for Years 2010, 2012, 2013, and 2014 remain unchanged and are illustrated by the below graph.
- UK GDP 2010 2.8%
- UK GDP 2011 = 2.3% - Revised down to 1.3%
- UK GDP 2012 = 1.1%
- UK GDP 2013 = 1.4%
- UK GDP 2014 = 3.1%
- UK GDP Mid 2015 = 3.3% - NEW
UK House Prices Valuation Against GDP Growth Trend Projection
The below graph illustrates the UK house prices trend against UK GDP Growth (Upto Q2 2010) against the Halifax Price Index for June 2010 of £166k, which results in a current reading of 37% overvaluation. The forecast trend for GDP growth as illustrated above when applied to the index shows a fall to an estimated 10% above GDP. Note this is not a forecast trend for UK house prices, but rather where the valuation index would stand against the forecast trend for the UK economy IF UK house prices STAYED at the current level. Therefore house prices rising or falling would put the actual index higher or lower than indicated.
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The above graph illustrates that the UK housing market is very sentiment driven, and in many ways exhibits the same sort of behaviour as that of stock market by moving between extremes of over valuation and under valuation against the UK 's GDP growth trend.
The current state of the UK housing market is state of 37% over valuation against GDP, down from an extreme reading of more than 60%, so still far from reaching a bottoming state associated with 0% and below. However against this if year on year economic growth materialises as forecast, then even if UK house prices did not change from the current levels then UK house prices will have trended towards a state of normalisation against GDP to an estimated reading of 10%. This is inline with my long standing expectations for the UK housing market to have entered a period of depression after the initial crash. However should the UK economy dip back into recession then contracting GDP would require UK house prices to trend significantly lower again, similarly should the UK economy perform more strongly than forecast, then that would provide a lift to UK house prices, so it will be important to track the trend in actual GDP against forecast GDP for relative strength or weakness indication for future house prices trend.
Conclusion - GDP Growth trend analysis points to a continuing depression in the UK housing market for the next 3-4 years, with the most probable outcome being for a gradual shallow drift lower in prices over the next 1-2 years (6-12%), followed by a further 1-2 years of base building.
UK House Price Forecast
This analysis is part of an on going series that will culminate in a multi-year UK house prices trend forecast (Free Ebook) that will seek to more than replicate the original 2 year bear market forecast of August 2007 made right at the very peak of the UK housing market (22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth ), which also builds up on the 100 page Inflation Mega-Trend Ebook of Jan 2010 (Free Download Now), which contained the following UK housing market analysis (updated graph):
UK Housing Bear Market Election Bounce
The UK housing market peaked in August 2007 and entered into a 2 year bear market exactly as forecast at the time (22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth ), analysis which projected towards a fall in UK house prices from August 2007 to August 2009 of between 15% and 25% that has subsequently came to pass as UK house prices bottomed in March 2009 after having fallen by 23% from the 2007 peak.
The UK housing bear market has experienced a strong bounce off of the March 2009 lows and now stands up approx 10% off of the low as a consequence of unprecedented measures as mentioned in this ebook, the Labour government has succeeded in temporarily bringing UK house price falls to a halt and triggering an Election Bounce.
The impact of the inflation mega-trend on the UK housing market will be for UK house price to be supported in nominal terms, however this it does NOT ignite the feel good factor that triggers housing market booms which only follow when house prices begin to significantly rise in REAL terms i.e. after inflation.
Whilst the current corrective bounce looks set continue into the middle of 2010 (allowing for a potential one month blip as a consequence of the bad January weather), this rally is still seen as a correction within a housing bear market that is expected to remain in a depression for many years, before house prices succumb to the effect of the inflation mega-trend and start to rise.
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By Nadeem Walayat
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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 UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 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. http://www.marketoracle.co.uk
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