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Elliott Wave Trading

UK House Price Crash of Summer 2008

Housing-Market / UK Housing Jul 22, 2008 - 06:57 AM GMT

By: Nadeem_Walayat

Housing-Market Best Financial Markets Analysis ArticleThe latest UK house price data as released by Rightmove shows that the UK housing market crash continues to accelerate by registering a fall of 1.8% for July 08. The rate of descent on an annualised basis now extends to -11% and on a quarterly basis to -6.7%, far above the originally forecast crash rate of 5% per quarter as per analysis of November 2007 for the quarter April to June 08, which came in at -5.8%. The housing market is in full panic selling mode, as property owners slashing prices are met with silence from potential home buyers.


On a slightly positive side, the quarterly rate of descent of -6.7% is unsustainable as that would imply a 12 month fall of 26.8%, far beyond anything that Britain has experienced in recorded house price history. Therefore this implies that the rate of descent will start to moderate by the release of September 2008 house price data in October, following which the current period will be come to be known as the House Price Crash of Summer 2008, still there is potential for UK house prices to end the year down by more than 11% far more than the original forecast for an annualised rate of descent of 7.5%, which was made before house prices started to fall following the August 07 peak. However, this suggests that house price falls will be skewed towards the period ending September 08, with the pace of decline moderating during 2009, probably declining at an annualized rate of less than 5% by September 2009 due to the impact of high inflation, as inflation erodes real terms housing market values whilst supporting nominal house prices.

A complete update and extensive analysis of the UK housing market will follow on the 12 month anniversary of the original forecast in August 2008, that aims to construct a trend forecast for UK house prices well into 2011. In the meantime the following graphs illustrate the degree to which the UK housing market is in crash mode regardless of misleading mainstream headlines during late 2007 and early 2008. The graphs also illustrate the anticipated trend into the end of 2008 which at this time is suggesting a pause in the bear market.

UK House Price Crash and Projected Trend into End 2008

UK House Price Crash and Projected Trend into End 2008

Buy to Let Investors in Panic Mode

The selling that began on the Capital Gains tax changes in April 08 has turned into a full fledged panic, as buy to let investors generating yields on property investments of between 4% and 5% are witnessing their capital evaporating at a rate of more than five times the return, under such circumstances the logical thing to do is to cut ones losses and run, and which is precisely what is happening and driving the UK housing market crash. The slump in commercial property also continues to contribute towards the housing bear market, as bad news amongst retailers is undoubtedly going to lead to a glut of vacant retail properties in the near future.

Buyers on Strike

The buyers have steadily gone from a position of wait and see to a position of no way hosey, as literally fear is starting to grip housing market participants in ever increasing numbers as potential buyers are being hit by multiple events all at the same time that are breaking the legs from under them both in terms of wanting to buy and being able to finance purchases. Briefly this includes the credit crunch which has resulted in a mortgage famine amongst risk averse distressed mortgage lenders. The UK economy is fast tipping towards recession which is being felt in many industries linked to consumer spending. Loss of confidence in the Bank of England and the Government as the buyers see the country lurch from one crisis to another. And last but not least the surge in energy and food prices which act as a tax on the consumer whereby consumers experience a real-terms loss of purchasing power that is not reflected in official inflation measures, many people have experienced inflation of as much as 10% during the past 12 months against the current CPI rate of 3,8%, this results in a real-terms loss of purchasing power of 6% against average earnings.

Media Warning 2008

Whilst I was penning articles warning of the impending house price crash, much of the media was again following the line as pumped out by press release after press release by vested interests in a stable housing market as I warned would occur in September 2007, and as illustrated by the following headlines -

UK house prices will escape America's crash - Liam Halligan , I agree the economy is weak. And a sharp drop in house prices isn't impossible. But, in my view, the evidence strongly suggests it won't happen. - Telegraph , (March 27, 2008) - I wonder how much the Telegraph pays for such 'accurate' commentary barely a week before the UK's House Price Crash Began !

UK house prices rebound strongly in February - Telegraph.co.uk - Miles Shipside, commercial director of Rightmove, said: "It's not the start of another price boom, but the interest rate cuts have no doubt given some sellers headier hopes." (Feb 19, 2008) - A single month corrective bounce within an established downtrend as the graphs clearly illustrate, was taken completely out of context.

UK house prices may defy the doomsayers - House prices across the nation will defy the doomsayers this year and settle to an average growth of 3pc, according to latest research from CB Richard Ellis. CB Richard Ellis says homeowners are in for a slowdown, not a crash. The group has even predicted that London will outperform the market at 6pc. - Telegraph (Jan 18, 2008) - Really a 3% growth for 2008 ? House prices are already down 9% on the start of the year with 5 months to go!

RICS sees unchanged UK house prices in 2008 despite initial weakness - The UK housing market could experience some near term weakness, but house prices should remain broadly unchanged next year, according to the Royal Institution of Chartered Surveyors. - Forbes - Dec 19, 2007 - House Prices are forecast to fall by 11% in 2008, RICS best stick to surveying rather than forecasting housing market trends.

UK house price inflation to drop to zero by Nov 2008 - Nationwide... - UK house price growth will slow to a halt next year, even if the Bank of England cuts interest rates, the Nationwide building ... ( Nov 16, 2007) - Forecast UK House Prices inflation will be - 11% By November 08, the Nationwide is consistently WRONG!

UK house prices to rise 40% by 2012 - UK house prices will increase 40% over the next five years because of a shortage of properties, a report by the National Housing Federation said. The average value of a home will rise to £302,400 ($618,000) by 2012, the London-based organisation, which represents 1,300 housing associations, said. Prices in London will jump 48% to £478,300. - (Aug 7, 2007) - The Icing on the Cake - 40% rise forecast at the precise peak of the UK housing market, I bet it seemed like a safe call at the time to forecast a gain of approx 8% per annum by a vested interest in a housing bull market.

and the list goes on and on..................

The above should illustrate the problem with the mainstream media in that they fail to perform their own in depth analysis to determine trend in an unbiased manner, instead of which there is a mad quick dash to quickly re-publish press releases produced by those who have a vested interest in rising house prices. Thus the readers have been continually misled into a house price crash situation by which time it is too late to do anything about it once the mainstream media finally wakes up to the fact that house prices HAVE CRASHED !

Against this avalanche of mindlessly repeating the same BS, which manages to drown out important warnings based on the actual analysis of key drivers of house prices and as I warned of on 22nd of August 2007 -

Whatever you do, remember that today's Idyllic pleasant picture in the UK is very shortly in for a rude awakening, much as the US home owners are experiencing in increasing numbers. The bull market in housing is over for now, better to realize this now whilst you have the opportunity to do something about it rather than be forced into a decision later on.

Which has long since been lost just as a snow flake would amongst an avalanche of bad press reporting, as transpired during the housing bear market of 1988 to 1994.

This problem is not just limited to house prices but occurs across the full spectrum of economic data from interest rates to economic growth. Growth rates for 2008 of between 2% and 2.5% were swallowed hook line and sinker, instead now there is total surprise at the alarming rate of slowdown of the UK economy which is heading for sharply lower growth for 2008, inline with the market oracle forecast of between 1% and 1.3% as of December 2007.

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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