Tuesday, January 01, 2008

House Prices falling

According to a variety of sources UK house prices are falling, with the Nationwide suggesting that they were 0.8% down in November and 0.5% down last month. This is a very sharp fall, and suggests that the housing bubble is deflating rapidly. Now, bubbles do burst, or rather sharp rises in asset values nearly always result in sharp falls as long term trends reassert themselves. There had been some argument that UK housing was different this time because of a shortage of supply over demand, but there are always arguments that sharp asset appreciation is 'different this time'. Remember the don-com bubble? Or the last time UK house prices went off the chart in 1989-90? That last experience is probably the best guide as to what happens next. For most people the answer is nothing as a rise or fall in the notional value of their property makes no difference because they were not planning to move and even if they did the relative values of the properties whey would sell and then buy have not changed. The problem comes with people who have been speculating on property and assuming that house prices would only ever go up. Investing in property in the hope of reselling quickly for a capital gain, or building up a property portfolio to let are now fraught with risk, and some people who have not been careful enough are likely to go to the wall. Then there are individuals who have been using their houses as a piggy bank by taking out secured loans against a notional value that may not be there any more. They only get into difficulty if they have to sell, as does anyone who bought at the peak of the market and now has to shift their suddenly over-valued property. Look for a number of personal disasters reported in the media over the coming months, but also for some quite severe commercial effects as the companies that support property-based loans feel the pinch. House-building is also going to slow down quite sharply against this market background, and large-scale projects with a large housing component might also face restructuring at the very least. Here in Basildon, where we have a considerable portfolio of regeneration projects then this is something that we will have to watch very carefully.

Politically, this is all bad for the government, especially as more housing is one of their key priorities. As things stand, the market is simply not going to deliver on the numbers stated by government ministers, and there is not much that they can do about it. Look for some imaginative excuses in 2008.

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