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UK House Prices GDP Adjusted Real Trend Forecast

Housing-Market / UK Housing Jun 23, 2008 - 01:30 AM GMT

By: Nadeem_Walayat

Housing-Market

Best Financial Markets Analysis ArticleThe UK housing bear market continues to gather momentum as the mainstream increasingly awakens to the prospects of falling house prices following house prices going negative on a year on year basis for Aprils house price data.

This analysis forms part of a series of articles that seeks to extend the current Market Oracle forecast forward for several years well beyond the current forecast for a 15% fall in nominal house prices between the August 2007 and August 2009 (as of August 2007).


Whilst many methods have been utilised to date in determining future housing market trend such as on the basis of average earnings, mortgage interest rates, currency valuation, inflation adjusted, comparison against other housing markets and real disposable earnings, this article brings to the table housing market analysis against UK GDP growth.

The assumption here is that the value of assets after stripping out inflation should increase in inline with the countries actual growth rate as measured by gross domestic product. While it is not to be taken purely in isolation as is with case of other methods of determining trend, it does however offer an additional window into formulating a long-range house price forecast.

The above graph illustrates that the UK housing market is very sentiment driven, and in many ways exhibits the same sort of behaviour as that of stock market investments moving between extremes of over valuation and undervaluation against the UK 's GDP growth trend.

Despite house prices having fallen by about 7% to date, the trend from an extreme reading of more than 45% above the GDP valuation has barely begun its decline. However this does not imply that house prices could fall by as much as another 50% to reach the oversold state associated with market bottoms as there are two factors which can help limit nominal falls in house prices and contribute to the correction in housing market valuations, those two factors are Inflation and GDP growth.

Inflation is on the rise and destined to hit near 20 year highs later this year, the worry for the Bank of England is that rocketing food and fuel prices may ignite a wage price spiral, where instead of one off hits from high fuel prices, corporations will increasingly give in to high wage demands which are then passed onto the consumers via higher prices which again results in high wage demands and thus the cycle repeats spiraling ever higher as wage price spiral takes hold. In a worst case scenario this can lead to hyper inflation the likes of which we have not seen since the 1970's when inflation soared above 20% per annum. Whilst hyper inflation is not expected at this moment in time, the RPI inflation index could pass above 6% which has the net effect of eroding housing market values by 6% per annum without the need for nominal fall in house prices.

UK GDP continues to grow inline with the Market Oracle forecast for 1.3% for 2008, with 2009 seen as touch and go as to whether there will be a recession, however even there the expectation is for limited downside as Gordon Brown preps the ground for an election by mid 2010. Thus GDP growth over the next 2 to 3 years is net supportive in the erosion of housing martket valuations without a significant fall in nominal house prices.

The most likely outcome is for inflation and GDP growth to erode housing market valuations for as long as the next 10 years towards a state of under valuation i.e. to reach the point where no one will be willing to touch properties as an investment with a barge poll, as happened during the late 1990's which turned out to be a great time to buy properties.

UK Housing Market Analysis:

26 May 2008 - US and UK Housing Bear Market Trends
22 May 2008 - Council of Mortgage Lenders 2008 Housing Market Forecast Demolished
08 May 2008 - UK House Prices Tumbling- Interest Rate Conundrum
21 Apr 2008 - Bank of England Throws £50 billion of Tax Payers Money at the Banks
17 Apr 2008 - Credit Crisis SCOOP- LIBOR Is Now Irrelevant to Derivatives Pricing
08 Apr 2008 - UK House Prices Plunge Over the Cliff
01 Apr 2008 - How to Fix the Credit Markets
11 Mar 2008 - RICS Data Confirms UK Housing Market Heading for 1990's Style Crash
03 Mar 2008 - Credit Crisis Morphs Into Stagflation- Protect Your Wealth!
26 Feb 2008 - UK House Prices Fall for 5 Months in a Row- Housing Market Will Go Negative April 08
07 Feb 2008 - UK Interest Rates Cut to 5.25% - Will Not Help the Housing Market
21 Dec 2007 - UK Commercial Properties Crash Looms as Property Investment Fund Frozen
07 Dec 2007 - Analysis of Interbank and Base Interest Rate Spread
05 Dec 2007 - UK Home Owners Unable to Refinance Mortgages As Fixed Rates Expire During 2008
02 Dec 2007 - UK Housing Slump Gains Momentum as Properties Fail to Sell at Auction
10th Nov 2007 - Crash in UK House Prices Forecast for April 2008 As Buy to Let Investors Sell on Capital Gains Tax Change
28th Oct 07 - UK House Prices - Primary Reasons For a Sharp Fall
25th Sep 07 - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!
22nd Aug 07 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth
1st May 07 - UK Housing Market Heading for a Property Crash

 

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 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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