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No house price rises soon...

14th Feb 2012

Category: Local property news

Tagged:House Prices, property investment

I thought of this piece after seeing the 'credit rating warning' article in the news today, and the news of more fiscal stimulation last week:

http://www.bbc.co.uk/news/uk-politics-17025472

The below is a quote from a piece we wrote on a forum in late 2009, it seems to be ringing true and in the light of recent housing data and news it is interesting to resurrect. Is there now more to add to this list? Discuss, send us an email to info@comfortlettings.co.uk and we'll include your thoughts (Comments section to be launched soon).

Quote below:

"Some key reasons why I think house prices are not going to rush off anywhere:

Biased data - Recent house price rises have been based on very low transaction volumes. If you look at how they have been bought, it is with a large deposit (i.e. spare cash has been soaked up). These types of purchases have, on the whole, been of larger/better quality houses - naturally more expensive. With a lower volume of sales, this trend distorts the average, hence you get monthly price rises.  However, your basic bread and butter housing is still selling at depressed prices, if selling at all, because the likely purchasers are struggling to get credit, next point.

Lending - 'Normal' purchases have smaller deposits and rely heavily on bank lending. The banks still have no appetite for lending on property. They do need to 'repair' their balance sheets, and at the moment the banks are not sold on turning the credit taps on.

Debt levels - There is no need to over egg this point, we are all fully aware there is a lot of debt.  But, it is MASSIVE, and it could get more expensive for the UK if their credit rating is lowered. Yes, that means more tax on us, in order to pay the interest on the money the UK government has borrowed. More tax = less spending power.

Public sector cuts - The UK economy is highly dependant on the public sector.  Any cuts to the public sector greatly affect the UK economy.  There is no need to prove the relationship between economic output and house prices, this is straightforward and well documented.  Public sector cuts will be large after the election, they have to be because of the huge debt levels the UK has.

UK bubble - The UK housing boom, saw one of the biggest growths out of all the developed countries.  Other countries, with much smaller bubbles (the US) have reacted downwards far more aggressively.  Our leading indicators therefore put us standing on a pretty crumbly and rocky edge, certainly not built on solid foundations.

Interest rates & fiscal stimulation - A 0.5% base rate is incredibly low, lets not forget this.  The government has printed billions of pounds in order to sure up the economy. This is not real money, it was simply printed (well pumped electronically).  Even with such drastic action, the UK economy posted just a 0.1% growth in GDP (edit - that was revised to 0.3%), this was a tragic result for such unprecedented action.  It is a sure sign that the 'recovery' is to be a long and sluggish affair.  Post election, we may begin to see more of this unfold.  To that effect, house prices are directly related to the economy and could perform very badly.

Wages - In order for house prices to rise, you need wage inflation.  There is none.  Lenders will not return to the lending criteria in the 'good years' and therefore house prices will be naturally depressed by a cap on lending multiples.  If this is capped and earnings are not increasing, then prices cannot sustainably rise, as the market is heavily dependent on mortgage borrowing, and mr and mrs average do not have the cash to purchase without borrowing."

Phil Ashford

Partner MEng(Hons) FCA MARLA

An experienced Chartered Accountant and a Founding Partner of Comfort Lettings.

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