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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

UK House Price Crash is Here as Forecast!

Housing-Market / UK Housing Jul 02, 2008 - 03:25 AM GMT

By: Nadeem_Walayat

Housing-Market Best Financial Markets Analysis ArticleThe Nationwide following on from a series of house price data releases by several mortgage banks and institutions in recent weeks confirmed that UK House price declines are set to accelerate over the summer months as the market heads for a crash that I first warned of occurring in the quarter April to June 2008 in November 2007. - "house prices could register a drop of as much as 5% in the quarter April 08 to June 08"


The Halifax house price data to be published in the next few days will show a house price fall of between 4% and 5% for the quarter April 2008 to June 2008 on an non seasonally adjusted basis this equates to an annualised rate of between -12% and -15% and thus will be recognised as a crash in UK house prices.

Despite house prices now falling by 6.3% on an annualised basis, the Nationwide continued to try and clutch at straws to talk the market higher by stating:

" • House prices fell by 0.9% in June, less than half the rate of the previous month
• Prices are 6.3% lower than this time last year, but remain 4% higher than 2 years ago "

Fionnuala Earley, Nationwide's Chief Economist, stating: "The pace of house price falls slowed significantly in June. House prices fell by 0.9% during the month, less than half of the rate of the 2.5% fall recorded in May. Prices in June are now 6.3% lower than this time last year and have fallen 7.3% from their peak last October. The price of a typical house is now £172,415. This is over £13,500 less than it would have cost at the top of the market and over £11,500 less than this time last year. However, the strength of house price growth up until last year means that prices are still 4% higher than two years ago and 9% higher than three years ago."

The mortgage banks that produce house price statistics have a vested interest in talking the market higher as I warned of in the article of September 2007 - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!

For instance Britains biggest mortgage bank, the Halifax as recently as March 2008, had their chief economist state "that strong underlying fundamentals will continue to support the market throughout 2008". "Over the past year, the average price of a home in the UK has increased by £4,390 to £196,649," he commented. "Whilst the housing market has slowed over the past six months, it is supported by sound economic fundamentals. Interest rate cuts by the Bank of England are also helping to underpin house prices,".

The Council of Mortgage lenders in May revised their forecast for 2008 from a 1% gain to a 7% drop. What is the point of constantly revising a forecast until it matches what actually has transpired by the conclusion of the forecast period ?

The Abbey recently declared as part of its 'Rent vs Buy' report that buying is £1,000 per year cheaper than renting, really ? Do they factor in the costs of buying such as stamp duty ?, The capital loss of falling house prices ? Do they adjust for the loss of interest that would have been earned on the purchase deposit and capital repayments to date ? Buildings Insurance ?

Quick Sums on Buying a £200,000 Property today.

Costs 1st Year

House Purchase Price 200,000
Mortgage 170,000
Deposit -30,000
Stamp Duty -2,000
Purchase costs -2,000
Repairs and Building Insurance 1% per annum -2,000
Capital Repayment @ £6500 per annum 0
Interest paid @ 6.25% -10,625
Cost Year 1 -16,625

 

Better off Renting or Buying ?

House price Value loss of 7.5% -15,000
Cost Year 1 -16,625
Total Cost of Buying for Year 1 -31,625
Rental Cost @ 5% of £200,000 original value -10,000
Add Interest that would have been earned on £30,000 deposit @ 5% 1,500
Add Interest That would have been earned on annual £6.5k capital repayment 325
Net Cost of Renting Year 1 -8,175
   
Worse of Buying than Renting in Year 1 alone! -23,450

 

Even if house prices were not falling buying would still cost twice that of renting for the first year i.e. £16,625 against £8,175. In year 2 this would be £12,625 against £7,850 for renting, so still far from being better off buying.

The casualty here are the many home owners that swallowed the upbeat ' housing market propaganda' and DELAYED acting in their best interests whilst they had the opportunity to do so, and NOW after reaching the near meltdown stage the mortgage banks are busy revising forecasts for 2008 lower at a time when home owners seeking to sell are left high and dry amidst an non functioning housing market place.

What makes matters worse is the fact that the falls to date are nothing compared to what is actually required to correct the grossly over priced UK housing market bubble. For not only will UK house prices fall for far longer and far deeper than press releases that are continuously repeated by the mainstream media imply, but that the UK housing market is destined to remain depressed for many years after the housing market bottoms in terms of nominal house prices. So those homeowners that are delaying taking action for say one year on the basis of consistently incorrect and overly optimistic vested interest generated forecasts seem destined to being forced into a decision under far worse circumstances.

Therefore much of the analysis that the mass media runs with on via press releases by the many housing market dependant financial institutions should be discounted if not totally ignored.

The actual state of the Housing Market as the following graphs suggest is that UK house prices have barely begun their bear market that could see house prices stagnate on a real terms basis for as long as the next 8 years. An in depth forecast to cover several years will be published in August 08 on the anniversary of the Market Oracles original forecast which called for a 15% drop over 2 years from August 2007 to August 2009.

The month of May saw the worst mortgage lending conditions since the British Bankers Association started recording mortgage data back in 1997 and confirms that the UK housing market is trending towards a 1990's style housing market depression. Not only that but UK mortgage banks are in for further distress and many more bad debt write down events to be accompanied by sharp share price markdowns as the market balks from the prospects of further right issues.

What homeowners currently are excluding from the house price trend equation is inflation, which gives a false sense of market trend as house prices are always seen as rising in the long-run, this opinion is set to change as inflation has the effect of eroding housing market values on a year on year basis without the need for falling house prices. Whilst the housing bull market roared ahead, inflation was a forgotten component. However even if house prices bottom during 2009-2010 prospective buyers will be wary of bidding prices higher due to the impact of inflation which implies that the market will stagnate for several years after a nominal low in UK house prices.


By Nadeem Walayat
http://www.marketoracle.co.uk

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 150 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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Comments

sally wilton
10 Jul 08, 08:51
Renting better than buying

I have just managed to sell my property at the full asking price - a miracle I think. Further to reading this I will definately be renting from now on and putting the money saved towards some fantastic holidays. Live for today!!!


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