Posted by: davidgarnerconsulting | September 9, 2009

Why UK House Prices Will Continue to Fall

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Once again yesterday there were echoes abound in the media that the UK property market is bottoming out.

But take a look at the data coming back from the front line, the Royal Institution of Chartered Surveyors (RICS), their latest residential lettings survey wasn’t really exactly cheery. And it has definitely not changed my view that UK house still have some way to fall.

Most “experts” talking about Britain’s property market seem to think that the slide in house prices over the past two years was just a fly in the ointment, and that everything’s rosy for the foreseeable future.

One headline reported yesterday’s RICS survey with the following headline: “Letting survey sign of recovery”. Sounds good, no?

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Well no, not when you look at the figures. In fact, there are more and more rental properties coming on to the market, especially from May to July. It was just happening slower than February to April. This is because people who had decided to rent instead of sell because of the flat market, have now decided to sell instead.

This simply means tenants still have more and more properties to choose from, and it remains a “tenants market” especially compared with two years ago, says Simon Rubenstein of RICS. Rental rates may be sliding slower than before, but that can’t be called a recovery, particularly with even more properties to come onto the market.

In my opinion, there are several good reasons to expect UK house prices to slide again soon.

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With interest rates holding at 0.5%, the next move will be upwards. It might not happen for a while, but when it does, borrowers who’ve been surviving due to low loan rates will then run into dark times again.

Secondly, we are most likely to see more redundancies, , and hence another leap in repossessions and forced selling, adding more supply to the market – pushing  prices down again.

Also affordability plays a big part. A lot of lending power has now left the market for good with circa. £300bn of UK mortgage debt packaged up and sold off from bank balance sheets onto the bond markets between 2005 and 2007.  And very little new money is coming on to the market as global investors are not falling over themselves to buy up UK securitised mortgage debt.

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In August a Rightmove survey told us that 78% of respondents thought UK house prices won’t fall any further this year, and also that “the UK property industry is now seeing a virtuous circle of confidence building upon confidence”.

So what’s the problem? In the FT, Anthony Bolton at Fidelity explained in the weekend’s FT, “if everyone is positioned for the market to rise, it means these bullish expectations are already discounted” – i.e. factored into the price. As a result, “the market often moves to make the majority wrong and does the unexpected… so at turning points especially, the correct is the minority view”.

And while there are plenty of differences between stocks and houses, the principles of the crowd remain the same for every asset class. When almost everyone is bullish, get ready for a price fall. The near-8.5% bounce in property prices within the last six months (using Nationwide’s figures at least) now looks ripe for a reversal.

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