House Prices – The Predictions
House prices – the predictions
House prices are going down there is no argument about that. Where the discussion starts is how far and how fast. According to the Halifax house price index the average price of a house in the UK has fallen by almost 16% from its’ peak reached in August 07.
Property Hawk has investigated some of the predictions for house prices produced by leading experts and commentators to ascertain just how far and fast they might fall over the coming months.
Where do professional landlords go for their landlord insurance?
Ok let’s get the bad news out of the way first. There is no shortage of experts willing to nail their flag to the mast of falling house prices.
There are several uber pessimists that have indicated that prices may fall by half or 50% from their peak before finally bottoming. This would mean that in nominal terms the average price of a house would fall to just under £100,000 using Halifax figures which showed that the average price of a house peaked in August 07 at £199,770.
Included amongst these pessimists is Jeremy Grantham of GMO the $126 bn US investment fund who back in July predicted that UK house prices:
“could easily decline 50% from their peak and at that lower level they would be higher than they were in 1997 as a multiple of income.”
Unsurprisingly Jonathan Davis of website Housepricecrash in October forecasts an equally sharp downturn of between 40-50%.
Most worryingly is Merryn Somerset Webb’s, Editor of Money Week suggestion in her column in the Financial Times that, it was entirely possible that house prices would fall 60% before the current crash called it a day. Her reasoning is that markets and prices tend to overshoot as in the case of the recent bubble in prices and then undershoot on the way down during a crash. The only cheer in her column is that she doesn’t think prices will fall 60%.
“40% would be more realistic”. Any body who has read Merryn’s editorial over the last year or so will know that she has been uncannily accurate with many of her predictions about the financial crisis.
In amongst the doom and gloom there will always be optimists. The glass is empty but they still see it as half full! So who are the house price optimists? Leading the barking optimists is David Orr of the National Housing Federation. His prediction back in July was for a rise in the average house price of 25% over the next 5 years to reach an average £274,700. No doubt he was pitching to the Government for more funds for affordable housing on behalf of his housing association members. This pitch of course over looks the fact that if the pessimists about falling house prices are right, then ultimately everybody will be able to afford a house. Or more accurately those few of us that remain with a job and a cast iron credit rating.
The remaining optimists comprised of those commentators who saw some localised ‘out performance’ in specific sectors of the UK housing market during 08. For instance London and Scotland were predicted by Fionnuala Earley of the Nationwide in December 07 to show small rises of 1 and 4% respectively. The Halifax Q3 figures shows that up to the end of September, house prices on an annualised basis in London fell almost 16% to an average of £320,847. Suffice to say there are not many optimists left.
Inevitably, the vast majority of commentators and predictions were predicting double digit falls in 08. Some notable figures such as Eric Daniels of Lloyds TSB which provided one in every four new mortgages in the 6 months to June suggested in July a 10-15% was likely. In the long term Graham Beale of the Nationwide forecast that house prices may have to come down 25% between 2008 and 2010 before there were any signs of recovery. It should be noted that banks, building societies and estate agents are not known for talking housing markets down, particularly when they are in a slump. The view of a more dispassionate commentator given back in March by James Hamilton an analyst at Numis Securities was that:
“UK property prices remain 44% over valued we expect them to go to a discount to fair value.” (44% over – valuation would result in a 30.55% price drop)
Our own Hawkeye in July anticipated that prices were likely to fall by 25% before fair value was restored. He also provided a caveat in his analysis that key to the size of the fall was whether employment held up. The latest prediction of 2m unemployed by Xmas and possibly 3m next year are not encouraging news.
Those landlords who took our advice back in September 07 may be quite glad that they did.