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5 "Tells" that the Stock Markets Are About to Reverse

UK Housing Market 15% Crash Forecast Fulfilled

Housing-Market / UK Housing Nov 07, 2008 - 09:55 AM GMT

By: Nadeem_Walayat

Housing-Market Diamond Rated - Best Financial Markets Analysis ArticleThe latest house price data by the Halifax shows that UK house prices have fallen by more than 16% from the peak of August 2007 and October 2008. The crash in both US and UK housing markets over the last 12 months was increasingly followed in September by the bankrupt banks collapsing one by one like a chain of dominos with governments rushing to their rescue during September and early october to the tune of unheard of amounts of tax payers money that now runs to collectively over $3 trillion. This first triggered near panic interest rate cuts in October of 0.5% which was yesterday followed by true panic cut of 1.5% which takes UK interests rates down to 50 year lows.


The whole trend for the house price crash has been forecast well in advance of events, right from the very peak to the initial down-trend path amidst prevailing mainstream denial that house prices were actually falling as recent as of March of this year, and right up to the most recent data that fulfills the original forecast of a 15% fall in average UK house prices as projected in August 2007.

The current house price forecast is now complete, therefore I now intend on working exclusively towards completing in-depth analysis geared towards generating the next accurate forecast for UK house prices to cover the next 2 to 3 years, which despite the now pervading bearishness may still have a surprise or two in store in the same way as the vast majority of analysts that have a vested interest in rising housing markets and the mainstream commentators that 15 months ago could not countenance that house prices could fall on an annualised basis, lost in the consensus of the soft landing let alone any contemplation of a house price crash as we are experiencing. Nor was my analysis a function of the perma-bears such as Capital Economics that have been forecasting a 20% crash since at least 2003, which missed a large part of the greatest housing bull market in history, that perma UK housing market bear status has now been quietly forgotten with much media praise and publicity for a worthless perma bear forecast that has been routinely repeated for some 4 years before UK house prices actually peaked !

In the mean time I leave you with the following selection quotes from articles that illustrate the monthly progress of the UK housing market crash that has subsequently come to pass.

August 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth

UK Housing Market Conclusion: The UK Housing market is expected to decline by at least 15% during the next 2 years. Despite the 2012 Olympics, London is expected to fall as much as 25%. UK Interest rates are either at or very near a peak, as there is an increasingly diminishing chance of a further rise in October 2007. After which UK interest rates should be cut as the UK housing market declines targeting a rate of 5% during the second half of 2008. The implications for this are that the UK economy is heading for sharply lower growth for 2008.

September 2007 - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!

The UK Housing market is teetering on the brink of a crash led by the buy to let sector investors jumping ship. But the messages coming from the major banks and UK central bank are still benign. In many ways the situation is reminiscent of the initial stages of the the early 1990's property bust, which was also accompanied by soothing statements that ignored the facts on the ground as this article will illustrate.

Of particular note is the March 89 report that The channel tunnel will lead to a 20% rise in prices, 4 months later that the tunnel will force prices down by 20% ! A 40% variation in 4 months !

By the end of 1989, despite house prices having started to fall during 1989 the banks and related institutions were still issuing bullish announcements on housing market expectations for 1990.

October 2007 - UK House Prices - Primary Reasons For a Sharp Fall

The UK housing market is trending towards at least 1 quarter of price action that could be termed as a crash. The most probable quarter is April to June 2008, i.e. inline with the change in capital gains tax rules. However I would not be surprised if this 'crashette' will be followed by several months of rising prices, which the estate agents / banks and media will jump upon as a signal for the end of the UK's housing slump. This is as much as was experienced during the last housing market bust of 1989 to 1992. After the corrective rally, the third and more protracted series of house price declines will begin.

November 2007 - Crash in UK House Prices Forecast for April 2008 As Buy to Let Investors Sell on Capital Gains Tax Change

The timing for the sharp drop is likely to coincide with Labour's change on capital gains tax which effectively cuts the tax payable on gains accumulated over the last few years to 18% from 40%. This tax change comes into force on 1st of April 2008 and thus the expectation is for an avalanche of selling amongst buy to let investors to lock in profits.

This also means that the market will to some degree be artificially supported going into April 08, but still will not be enough to prevent a wider decline in UK house prices but rather could register a drop of as much as 5% in the quarter April 08 to June 08 , which would represent a crash in UK house prices.

December 2007 - UK Commercial Properties Crash Looms as Property Investment Fund Frozen

Investors should not delude themselves into thinking that just commercial property unit trusts will be hit, the contagion could spread across the whole unit trust sector if investors realise that when the times come to sell, the won't be able to. The last time we witnessed such panic was just 3 months ago when savers queued outside Northern Rock Bank to withdraw savings.

Unlike savings accounts, I cannot imagine how the FSA and Bank of England could step in to guarantee investors ability to liquidate assets. It is just not possible.

Your 'renting' analyst watching the unfolding UK housing crash from the sidelines.

January 2008 - UK Housing Bear Market Confirmed

Conclusion - The UK Housing market has confirmed its downtrend and is on track towards an average decline of 15% by August 2009 . The impact of declining house prices has yet to bite the economy with a crashette scheduled in the quarter April to June 08 during which time we may see a plethora of headlines 'UK House Prices Crash'.

February 2008 - UK House Prices Fall for 5 Months in a Row- Housing Market Will Go Negative April 08

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 ).

March 2008 - UK House Prices Fall in February- Home Owners have Lost £7,600 in 6 months!

Home owners who bought early into the boom and are now sitting on gains of 200% or more may think that in the light of a 15% drop there is nothing much to worry about need to reconsider how they calculate the impact of a 15% fall - A 15% nominal fall in house prices on a 200% gain is an effective loss of 22.5% of the gain (£200k examples) i.e. £200,000 X 15% = £30,000 house price fall; £30,000 / £133,333 Gain = 22.5% loss of gain. Add RPI inflation of 8.5% (over 2 years) and that's a real terms loss of 35% of the gain, on a £200k house that's equivalent to £47,000 (133,000 X 35%), ignoring inflation that is still a £30,000 nominal loss.

I have received several emails asking if I expect the UK housing market to bottom in August 2009. My response is that we are still at the beginning of the UK housing bear market that I expect to run to August 2009. There is no sign at this point in time to suggest that August 2009 will be a bottom as the UK economy by that time will be either in or close to being in recession. However, towards the end of this year (2008), I will be able to update the housing market forecast to beyond 2009.

April 2008 - UK House Prices Plunge Over the Cliff

The UK Housing market is on track for a significant drop in house prices going into 2010 of as much as 33%. March's 2.5% price drop will be followed by a further sharp fall in April 08, following which time many house price indices will have gone negative on an annualised basis. This will be the trigger for house price crash headlines across much of the UK media.

May 2008 - US and UK Housing Bear Market Trends

As the US market is discovering, government attempts to inflate their way out of a nominal house price falls will not work during a time of an emerging markets demand led secular commodities bull market, throw in the consequences of peak oil and you have all of the hall marks of nominal housing market price falls despite rising inflation, as consumers have even less cash available after paying for the rising costs of necessities then to service increasingly expensive mortgages that have reset to higher interest rates by banks with decimated balance sheets as a consequence of the ongoing credit contraction. Thus an economic environment of building stagflation with deflationary forces equals a cycle of continuing house price falls triggering even further deflationary credit contraction amongst risk averse lenders.

June 2008 - UK Housing Bear Market Threatening Economic Deflation

Yes, the recent rise in the oil prices is inflationary, however they are a one off shock at the time they occur, meaning that in 12 months time they as if by magic disappear from the year on year inflation indices, however what permanently remains is the deflationary impact as they act as a permanent tax on the consumer unless the consumer demands higher pay which risks a domestic wage price spiral. 2009 is definitely going to be a tough jekyll and hyde year where the first half will be the fight against inflation followed by the second half fight against deflation, where the forces of deflation as witnessed by the Great Depression are far more destructive.

July 2008 - UK House Price Crash In Progress!

The housing bear market is approaching its first anniversary in August 2008, and in preparation of which I am seeking to extend the existing housing market forecast for a 15% fall from August 2007 to August 2009, by way of extensive analysis that will carry the trend well into 2011. In the meantime the following housing market graphs give a flavor of the ongoing crash and how far house prices have the potential to fall before any talk of a bottom can be taken seriously.

August 2008 - UK Housing Market Freezes as Chancellor Dithers Over Stamp Duty

The crashing UK housing market is heading for a further deep freeze following speculation that the Chancellor, Alistair Darling is about to suspend the Stamp Duty tax charged on house purchases in an attempt to stabalise the housing market. The few buyers that are in a position to proceed with home purchases are now delaying completing contracts or pulling out altogether and thereby likely to make the collapse in the level of market transactions even worse, thus contributing to the squeeze on sellers, estate agents and other housing market transaction beneficiaries.

September 2008 - Bradford & Bingley Nationalised Another UK Bank Wiped Out by Tulip Backed Securities

The implications for the UK housing market both as a consequence of the HBOS takeover and Bradford and Bingley bust are going to hit the mortgage market hard with both a reduction in supply of mortgages and an eagerness of the two banks to seek to reduce their mortgage books by trying to induce their customers to remortgage to other banks via higher mortgage interest rates and therefore reduce their risks of default in the wake of the ongoing housing bear market.

October 2008 - UK Economic Crash Follows Housing, Stocks and Sterling Over the Cliff

The Halifax's house price data shows that the housing market crash continued to accelerate into August, by plunging by 1.7% that saw another £3000 wiped off house prices following the £3,300 write off for July to stand at down 12.8% on the year to August (on a non seasonally adjusted basis). UK house prices have now fallen by more than 9% since April (taking sept into account).

November 2008 - Credit Quake Persists Ahead of UK Interest Rate Cut of 1%?

The credit quake in the wake of Lehman's Bankruptcy continues to persist as observed by the Sterling LIBOR spread to the base interest rate. Despite all of the government actions to date of increasing tax payers liability by £500 billion to get the money markets to unfreeze and the banks lending again, the rate spread suggests that there has been little movement in the money markets. On the contrary it increasingly seems that the part nationalised banks are using tax payers money for mergers and acquisition purposes rather than lending.

What this effectively means is that the impact of interest rate cuts on the economy is subdued which implies that whilst UK interest rates stand at 4.5%, the impact on the economy is if interest rates were at 5.5%. Therefore a 0.5% cut to 4% would imply an economic rate of 5%, this reinforces the possibility of a rate cut of 1% to 3.5% would have the impact of bringing the rate to the economy down to 4.6%. This suggests that interest rates should be cut far more deeply than 'economic theory' that the academics in the ivory towers work with suggests i.e. to reach an economic rate of 3.5% we would need to see a UK interest rate of as low as 2%.

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 derivatives, portfolio management and analysing 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

Classic Labour
13 Nov 08, 17:36
House Prices

House prices are still far too high on any interpretation of historical trends. Expect a 35% reduction on November 2008 prices: that is the minimum.


Mark Foster
17 Nov 08, 07:39
When will these market trends be seen in estate agent windows?

I appreciate your forecasts, it's prevented me from buying into the housing market.

I'm keeping an eye on market prices, or at least those advertised by estate agents. In the residential market, I don't see much change in the estate agent's advertised prices. When do you think the reality of the housing crash will filter through to the high street?


Nadeem_Walayat
17 Nov 08, 09:14
UK House Prices

MY detailed forecast update is under development and as will cover in detail of what to expect and do during the next few years.

Basically the UK housing market has only recently moved out of the denial phase and into the fear phase as recent as March of this yea the vested interests such as the Chief Economist of the Halifax were publishing ridiculous research that said house prices could not fall this year.

Those closest to the housing market are the most in denial, hence many estate agents will fail to react to the changed market and basically go bust.


David Thomas
18 Nov 08, 04:18
UK housing forecast

Thanks for your insights so far - very much looking forward to your next forecast.

All the best - a considered and educated view is very much appreciated.


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