Still bearish about house prices

by Ed Bowsher on 01 June 2009  |  2 comments
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Harvey Jones and I are at daggers drawn. Harvey reckons the house price crash is over. I disagree.

I enjoyed reading "The house price crash is over" by Harvey Jones this morning.

It's a good article and I agree with some of Harvey's comments. Especially this paragraph:

"So I thought a property crash would bring some benefits. I didn't want to see the younger generation mortgaged up to the hilt to fund the winners in the equity lottery. Or millions of people barred from home ownership for life."

But I disagree when he says: "After months of arguing that a good old-fashioned house price crash is exactly what we need, I've finally accepted that it's all over."

Harvey is right when he says there have been a few bits of data in the last week which suggest the housing market may have hit bottom. One example is Nationwide's report that house prices rose 1.2% in May.

And I confess that I've had the odd moment of doubt in recent days, but having thought about it some more, I still expect house prices to fall further. That's regardless of a few green shoots we can see now. Here's why:

- markets don't normally move in straight lines. You'll get monthly blips now and then.

- I believe the recovery from this recession will be slow. Some people appear to think the good times are back. They're wrong. Once people realize what a mess the UK is in, they'll be less keen and less able to buy property.

- UK house prices are still higher than their long-term average when you use the house price/earnings ratio.

- Unemployment is set to rise a fair bit higher which will trigger further home sales. That's regardless of how low interest rates may be. And anyway, interest rates will probably move upwards in 2010.

- Yes, the banks are beginning to lend more freely, but it's early days and it'll be a long time before the mortgage market returns to the exuberance of 2006/7.

- any rise in prices will bring out more sellers. Increased supply will quickly drive prices down again.

Of course, I could be wrong. No one can predict the future with 100% uncertainty. But a 10% fall from here still looks  the most likely scenario to me.

Read more of Ed's posts at The Bowsher Blog.