UK House Prices Bottom or Temporary Summer Bounce?

By: Nadeem_Walayat

UK House prices have now fallen by more than 22% from the peak and down 13-16% over the past 12 months with the most recent data across a series of house price indexes such as that of the local government & communities, Nationwide and even the Halifax suggestive of near term support for UK house prices as we move into the seasonally stronger summer months.

The unprecedented UK house prices drop of 22% to date has definitely sparked interest amongst prospective home buyers to venture out into the warm summer months after having held off from viewing / purchasing during the past 12 months. This new demand is reflected in data from estate agents who report a surge in the number of new buyers registering with their agencies to the highest numbers in 10 years. This is backed by Chartered Surveyors data (RICS) which show 70% of surveyors report a surge in new buyer inquiries.

Therefore the UK housing market is definitely seeing liquid buyers return to the market which 'should' be reflected in rising house prices during the summer months that undoubtedly will increasingly be taken by the mainstream press to conclude that the house prices have bottomed.

However the flaw in the analysis for those that will jump onto the bandwagon of a bottom in UK house prices is the fact that the UK economy continues to contract lower towards my forecast of -4.75% for 2009, with the Bank of England admitting yesterday that it is totally clueless as to what will happen next after having failed abysmally to manage the financial system and wider economy during the past 12 months, which has resulted in unemployment that looks set to continue rising to a break above 3,000,000 this year.

Affordability

One of the key drivers of the housing bear market is housing affordability levels which remain at extremely high levels which implies we are perhaps just past the half way mark in terms of house price trend as the below graph illustrates.

Interest Rates

Yes, base interest rates have crashed to an unprecedented level of just 0.5%, however this is NOT translating into mortgage rates of anywhere near 0.5% with SVR's stubbornly remaining above 5% and many fixed deal offerings in the region of 4 to 5%. All of which is accompanied by ever tight lending requirements. On top of this we have the governments huge issuance of gilts this year well north of £220 billion that has resulted in the other unprecedented policy of Quantitative Easing aka Money printing to buy up the bonds the effect of which is inflationary as despite the short-term bounce in sterling it will put the British Pound under increasing pressure hence implies higher interest rates.

Mortgage Market

The tightness in the supply of mortgages is reflected in the data, that is at near 1/3rd the level of the recent bull market peaks.

Repossessions and Negative Equity

Whilst the number of repossessions is forecast to hit a high of 75,000 this year, matching the the early 1990's peak of 75,000, however this masks the impact of all of the government initiatives and bank arm twisting measures in an attempt to artificially keep people in their homes by a variety of means such as the "Mortgage Rescue Scheme" in the run up to the 2010 general election. This therefore means that reported repossessions data such as that from the Council of Mortgage Lenders (CML) will tend to under-report the true state of the impact of repossessions on the UK housing market as the reported repossession figures will mark but the tip of a much larger ice berg that could run to as much as a million home owners in arrears and helped to stay in their properties in one shape or another that will continue to impact negatively on the housing market price trend due to the supply of negative equity over hanging the market, that eagerly await a return to the housing boom to sell into.

UK House Prices Forecast

This therefore supports my recent in depth analysis which concluded that UK house prices could experience a technical summer bounce, however this bounce will not be sustained as once these new buyers have bought, the overwhelming bearish fundamentals will reassert themselves with the bear market resuming with a vengeance later in the year.

So yes, UK house prices will perhaps moderate towards a 2009 decline of -10% from the forecast of -16%, however the downtrend is expected to continue for many more years at a shallower pace as the housing market depression will see house prices drift towards the forecast for a peak to trough contraction of approx 38%.

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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