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6 Critical Money Making Rules

The housing bear market will result in a recession

Housing-Market / UK Housing Mar 18, 2005 - 06:00 PM GMT

By: Nadeem_Walayat

Housing-Market It is inherent in market systems, to move to between extremes, so at the very least real house prices will decline by 10%, depending on the effects on the economy, which obviously will be negative this will feed through to further declines.

As the bull trend in house prices from 1994 to 2004 was unprecedented, so it can be imagined that the bear trend from 2005 to 200? will also be unprecedented.

Plain old market driving forces of fear and greed. For there is no real reason why house prices have tripled other than greed.

A real 10% drop in house prices will be very bad.
A real 20% drop in house prices will be disastrous
A real 30% drop in house prices will be catastrophic


We will only see the true effect once the trend gathers steam.


A 10% drop would result in a recession...
So many reasons why. THOUGH ! It COULD be offset IF the other main asset class i.e. stock market soared.

What would happen ?
It would make people both be and feel less rich and thus cut back on spending. Which in turn would slow down economic activity and companies would cut back on investment and hiring of staff.

The reduced tax revenue would result in taxes going up and thus dampening demand further which would feed back into the loop, resulting in even lower house prices.

There are so many aspects from the significant effect of small real house price drops as against peoples expectations of rises in house prices., which has a much larger impact on people holding property than can be imagined by just focusing on and saying 10% is not much of a drop...

People expect house prices to rise.... Now if house prices FELL over the next 3 years by say 10%, that would imply a 20% difference on where people expected the asset to be. I.e. at the very least they would have expected a 10% rise, (which given recent activity is pretty much nothing). NOW the effect will be further felt, as inflation will have risen and incomes will have risen so house prices as a % of these indicators would be much lower... thus perceived loss of wealth would be felt even more.

In summary - People expect house prices to rise, if they don't then they feel a monetary loss, i.e. even a savings account would grow by 5% a year or some 17% compound over 3 years. If house prices fall then the effect is even greater ! as now your perceiving a 27% loss on a 10% drop !

If the REAL drop is 30% ! Then that would be catastrophic !

This is the reason why the 12% or so drop in REAL prices in the early 90's resulted in a significant recession... Though given today's low inflation climate a real drop of 12% today would be much more significant !

I think the UK is headed for a recession as the effects of the slowing housing market feeds on itself to slow the economy down and again the housing market. Once started, the only only way the trend will reverse is when the cycle reaches a stage where houses have been priced at an extremely cheap level which will again ignite demand and so the boom - bust cycle begins again !


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Comments

Robin Pang
26 Nov 10, 01:03
More than 5 years after this piece of analysis

Excellent and spot on. It is interesting reading this piece more than 5 years after the financial crisis matched only by the Great Depression of '29 that just past. Nadeem's analysis is again, spot on. Applaus applaus ! :-)


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6 Critical Money Making Rules