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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

UK House Prices Fall for 5 Months in a Row- Housing Market Will Go Negative April 08

Housing-Market / UK Housing Feb 26, 2008 - 12:03 AM GMT

By: Nadeem_Walayat

Housing-Market Best Financial Markets Analysis ArticleHometracks house price data released on Monday points to house prices in England and Wales falling for 5 straight months in a row as banks tightened lending criteria as the risks of residential housing market bad debt exposure continues to grow. Annual UK house price inflation fell to a near 2 year low of 1.4%. The hometrack data is in line with the Market Oracle forecast as of August 2007 for a fall in average UK house prices of 15% over two years to August 2009.


The November 07 article explained that buy to let investors selling will ensure a further sharp deterioration in the UK housing market during the quarter April 2008 to June 2008. Many analysts fail to realise that the house prices for the months of April through June 2007, i.e. last year, are significantly above the CURRENT average house price, therefore even if house prices do not fall, i.e. stabalise; UK house prices will still go negative in April 2008, as the table below demonstrates (Halifax data).

Annualised UK House Price Inflation 2008 Stabalised house prices House prices fall by £500 per month
March 2008
1.1%
0.6%
April 2008
-1%
-1.8%
May 2008
-3.5%
-4.5%
June 2008
-4%
-5.3%
Dec 2008
-1.5%
-4.4%

 

The actual trend expectation as per November 2007, is for a sharp drop in the quarter April to June 2008 due to the impact of the capital gains tax rule changes on the buy to let sector from April 08 onwards. Following which house prices may stabalise at lower levels for some months before the next series of declines takes place as the UK economy slows going into 2009. This trend would imply that the UK will end 2008 with a house price decline of about 9% from the August 2007 highs and at annualised house price deflation of as much as 7% this summer, which would be expected to reduce to under 5% by the end of 2008 as the following graph illustrates.

The UK housing market remains at historically high unaffordability levels as illustrated by the Market Oracle UK House Price Affordability Index. Affordability concerns will continue to come to the fore as the expectations of capital appreciation diminishes and the number of repossessions continues to escalate as record amounts of debt put households under increasing pressure.

The UK Economy is expected to far under perform the Bank of England's forecast for 2% growth with the Market Oracle growth forecast for 2008 of between 1.1% and 1.4% as of December 07. Apparently the consequences of the evaporation of Mortgage Equity Withdrawals has not been fully taken into account by economic forecasters, despite the fact that MEW consumption has accounted for as much as 1% of the growth in annual GDP for the duration of the housing boom.

UK Interest rates are on track with the Market Oracle forecast as of August 07 and Sept 07 for UK interest rates to fall to 5% by September 2008, this was revised lower to 4.75% in January 2008 , following the US Panic rate cut 0.75% on 22nd Jan 08 to 3.5% which was later followed by a further 0.5% cut to 3%

UK inflation, interest rate forecast 2008

 

However, UK Interest rate cuts won't be of much help to home owners due to the impact of the wealth effect going into reverse as house prices continue their month on month declines. For example on an average mortgage of £100k, a 0.25% cut in interest rates would result in a cut in monthly repayments of just £21. Whereas a decline in house prices of 0.5% per month results in a monthly loss of equity of £950 on an average £190,000 property. Therefore many market commentators and economists expecting a series of rate cuts to turn the UK housing market around may be surprised that the rate cuts will have very little impact on the weakening housing market.

The impact of the interest rate cut on the UK housing market is further diminished due to the fact that mortgage lenders raised interest rates in the weeks preceding Februarys interest rate decision with a view to declaring a cut of 0.25% following the decision. However this means that the real cut compared to a few weeks earlier is negligible, if any at all. ( 31st Jan 2008 ).

By Nadeem Walayat

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 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

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.

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© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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