UK House Prices Tumbling- Interest Rate Conundrum

By: Nadeem_Walayat

UK house price data from Britains biggest mortgage banks for April 08 now show negative house price inflation year on year. Statistics released earlier than usual by the the Nationwide that house prices have now fallen by 1% on a year earlier, closely followed by the Halifax that also shows house prices down by 1%. This was originally forecast by the Market Oracle for the April 2008 house price data in the analysis of November 2007.

Despite the fall, the Nationwide put a positive spin on bad news by alluding to the Bank of England rate cuts and liquidly measures that would stabalise the housing market: "the Bank’s measures should help to restore a more orderly transition and ultimately bring about a more stable market."

What the Nationwide failed to mention is that house prices according to the Nationwide's own data have now fallen by £8,000 (4.4%) from their data's last October peak. Clearly, the Nationwide and other institutions with a vested interest in a stable housing market and will put a positive spin on bad news. This is precisely what transpired during the last housing bust as the following article from Sept 07 illustrates - UK Housing Market on Brink of Price Crash - Media Lessons from 1989! . The Nationwide's forecasts for house prices during 2008 have been consistently over optimistic, back in November 07 the Nationwide was forecasting zero growth for 2008.

Britains biggest mortgage bank also gave a positive spin on UK House prices in March 08, the Halifax's Chief Economist continued to suggest that there will be no fall in UK house prices this year. - "strong underlying fundamentals will continue to support the market throughout 2008". "Over the past year, the average price of a home in the UK has increased by £4,390 to £196,649," he commented. "Whilst the housing market has slowed over the past six months, it is supported by sound economic fundamentals. Interest rate cuts by the Bank of England are also helping to underpin house prices,".

My earlier analysis of February 2008 illustrated why it was impossible for UK house prices to avoid going negative in April 08, not only that but even if house prices stabalised and no longer fell, that the property market would still be heading for a sharp year on year fall for the quarter April to June 2008, which the media would eventually term as a mini-crash for the UK property market as the below table from the February article illustrates.

The actual state of the housing market is worse than which the headline seasonally manipulated data implies, as the non seasonally adjusted data now puts UK house prices as down 3,7% from an year earlier. The actual downtrend for UK house prices is at the more extreme end of the forecast range as the below graph illustrates.

The expectations are for the trend to continue to deteriorate throughout the summer months and for year on year house prices to possibly overshoot to the downside to beyond the expected low of about -6% by the release of the the July 08 statistics. However, subsequently house prices should start to stabalise in the range of -5% year on year.

The actual house price trend is on target with the Market Oracle forecast for a 15% decline from August 07 to August 09.

By the end of 2008 UK house prices will have fallen by more than 10% from their August 2007 peak, down approx £20,000 for the average UK property. This fall will impact hard on the home owning consumer who over the years had become used to the wealth of effect of rising house prices which was capitalized upon through equity withdrawals that now continue to contract in the face of a a still deepening credit crisis despite the Treasury and the Bank of England letting rip on a potentially inflationary growth in the money supply via an open ended facility for distressed banks to literally exchange hundreds of billions of bad mortgage backed bonds for government stock. The consequences for this policy is to continue to drive the British Pound significantly lower and thus contribute to the building inflationary forces as a weak UK economy enters into 2009 which increases the probability of stagflation during 2009.

UK Interest Rate Conundrum

At present UK interest rates are on track to meet the Market Oracle forecast of Sept 07 and the Jan 08 revision to fall to 4.75% by September 2008. However increasingly politics will come into play as we move into 2009 as Gordon Brown will attempt to buy the next election in the face of increasing voter discontent at the poor level of competency observed during the first year of his premiership.

This makes the projected trend beyond September 2008 harder to ascertain at this point in time, due to the possibility that the Bank of England may be forced to abandon the 2% inflation target in favour of measures to boost a faltering UK economy ahead of a UK general election. This suggests that we may see negative interest rates in the UK, i.e. the UK base rate being cut to below the rate of inflation as measured by the RPI inflation measure. The current spread between the base rate and RPI is a healthy 1.2%. Savers had the opportunity at the start of the year to lock in at rates approaching 7%, which I have consistently suggested as a too good an opportunity to miss following the emergence of the credit crisis in July 07. The credit crisis still continues to benefit savers with high fixed savings rates available from too big to be allowed to go bust institutions such as the Halifax's 4 year fixed rate Cash ISA paying a healthy 6.2%.

Today is interest rate decision day and the expectation is that the panic button for the trend towards negative real interest rates has yet to be pressed, therefore the probability favour's UK interest rates to be kept on hold at today's Bank of England MPC meeting.

Will Gordon Brown succeed in boosting the UK Economy ?

I don't think so! The UK economic slowdown is accelerating as the credit crisis increasingly impacts UK businesses as evidenced by the sharp fall in manufacturing output of 0.5% during March 2008. GDP growth is headed towards the Market Oracle forecast of 1.3% growth for 2008 (Dec 07), well below the governments original forecast of 2.5% and current estimate of 2%. What is surprising is that the government is still basing its budget on growth of 2.5% for 2009, when in all likelyhood the UK will be lucky to avoid a recession.

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By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 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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