FSA to Regulate UK House Prices Lower

Housing-Market / UK Housing Mar 20, 2009 - 04:53 PM GMT

Best Financial Markets Analysis Article The FSA has proposed changes to limit the amount of money people can borrow for house purchases which includes minimum deposits of as much as 15% of the value of the property as part of the Chairman of the FSA, Lord Turners review into the banking crisis. The aim of the review is to put an end to the high risk mortgages that at the height of the housing boom had the likes of the now nationalised Northern Rock bank allowing mortgages of upto 125% of the value of property, far in excess of the X3.5 safe salary multiple which witnessed self certification mortgages of as much as X10 salaries with the accepted norm of more than X5 salaries.

I can imagine that the proposed changes will be met by much resistance from the financial industry as it will in one fail swoop bring a halt to the boom and bust cycle i.e. if loans are fixed at X3.5 salary then it would have been impossible for UK house prices to have risen to an average of £200,000 which equates to more than X6.6 salaries, which allowed those in the industry to bank huge commissions and bonuses amidst a speculative fever, only for the bust to have dumped all of the bankrupt banks bad debt liabilities that run to the hundreds of billions of pounds onto the UK tax payer. Whilst it is too little too late now, it will however prevent the next boom and bust from occurring as long as the proposals are actually implemented, which would point to a different type of UK housing market that may perhaps result in a sea change in public perception from that of becoming home owners to favouring renting as house price growth will effectively be regulated by the regulator inline with average earnings.

The average house price has now fallen from £200,000 to just under £160,000 for February Halifax data, which implies the maximum loan at X3.5 salary on the average £30,000 salary would be cut to £105,000, on top of this there is a requirement for a deposit of 15% which on £160k amounts to £24k. This therefore implies the maximum house price in a functioning market should be £129k or still nearly 20% lower than where house prices stand today.

However the Labour government has embarked on an programme of Quantative Inflation the consequences of which will be much higher inflation than any one can estimate at this point based on the existing deflationary trend as a consequence of debt delveraging as the government seeks to fill the gap with public debt monetized by printing money to force the long yield curve lower, which effectively means devaluing the value of the british pound and thus inflating prices such as wages and house prices to give the illusion of a market that has stopped falling in nominal terms, i.e. an attempt to fill the gap between £129k and £160k by inflating wages in nominal terms.

UK Housing Market Trend and Current State.

UK house prices peaked in August 2007 (UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth) The rate of decent peaked for December data at -19% and has now declined to -17.7% . The rise in UK house prices during January 09 brought a brief pause to the house price crash that resumed its bear market in February into its 19th month as the below graph illustrates which is per the updated house price forecast that covers the trend into 2012 which projects for a total drop from peak to trough of 38%. However, as I have warned many times over the past 19 months, the government has in its power the ability to print money to bring nominal house price falls to standstill, this money printing is now quaintly termed as "Quantative Easing" so as to hide the truth and mask the continuing crash in house prices that despite the opinion of the mainstream press by the likes of Anatole Kaletsky and Ambrose Evans-Pritchard HAS put Britain on the path towards bankruptcy, as explained in the depth analysis of November 2008 - Bankrupt Britain Trending Towards Hyper-Inflation?, and updated more recently - Gordon Brown Bankrupting Britain as Tax Payer Liabilities Soar- Update

As mentioned earlier, nominal UK house prices will be increasingly supported by the highly inflationary measures being put into action whilst real terms values continue to erode. This therefore increasingly points to a gradual decline in the rate of house price falls, and suggests a prolonged period of stagnation, which suggests that UK housing market is targeting a shallower rate of decline in the order of another 14%-16% over the next 2 years rather than the scare mongering headlines of recent weeks as the mainstream press ran with a dubious report that UK house prices could fall by another 55%. This in my opinion is not going to happen, not in the soon to become apparent highly inflationary environment of quantitative inflation that many of the worlds economies are moving towards as they seek to print money in the form of monetizing their debt by buying government bonds and thus artificially lowering long interest rates by increasing the amount of currency in circulation by the hundreds of billions if not trillions.

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

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

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

Kathryn 20 Mar 09, 17:31	Yet the government are still giving the equivalent of 100% + mortgages to FTB's The article says the FSA want to regulate the market and "put an end to high risk mortgages", yet the governments new Home Buy scheme is offering FTB's 50% loans for deposits on property so they can get 50% mortgages. The loan are offered on any property and at 1.75% . Dependng on how much below peak the property is, this is the equivalent of a 100% mortage on a property currently 30% off peak with or a 130% mortgage on a property still at 2007 prices, which could end up a 150% mortgage by next year. HOW CAN THIS BE ALLOWED TO HAPPEN? How can anyne consider this repsonsible lending or in any FTB's best interest in a falling market?
21 Mar 09, 14:08	house prices The graph dooes not allow for 'dead cat bounce' in 2009. Which has already happened. Estate Agents near to me have increased houses sold at peak in 2007 [for £167k] to £227k in 2009!! Ridiculos! This chart is optimistic. I think the average house price will drop more than 50% from peak. There are amn ever growing number of houses already 50% from peak. As soon as Interest Rates are raised again, house prices will fall through the floor. Labour are an utter disgrace.
House prices. 21 Mar 09, 19:30	Angelina They may inflate house prices. They won't inflate wages. Therefor analysis is incorrect on multiples of earnings. And don't forget after election taxes rise
TJM Ridley 22 Mar 09, 01:14	Inflation on the way Agreed - inflation is almost inevitable. However do you think that salaries will rise as quickly with the numbers of unemployed soaring and people chasing jobs. I think it may take some time before the inflation hits us - meantime the house prices will continue to crash unabated. I was staggered by the revelation that the "Government" owned banks are lending at the 100% LTV in a falling market - a good guide to where the market is going is when the "good" rates move from 60% LTV to 85 or 90% - the lender recognises that their investment is safe - also look at the longer fixed rate deals - when the 5 year deals start to get more expensive then the banks are warning the the intrest rates are going up and inflation is likely to kick in!

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