UK House Prices GDP Adjusted Real Trend Forecast

By: Nadeem_Walayat

The UK housing bear market continues to gather momentum as the mainstream increasingly awakens to the prospects of falling house prices following house prices going negative on a year on year basis for Aprils house price data.

This analysis forms part of a series of articles that seeks to extend the current Market Oracle forecast forward for several years well beyond the current forecast for a 15% fall in nominal house prices between the August 2007 and August 2009 (as of August 2007).

Whilst many methods have been utilised to date in determining future housing market trend such as on the basis of average earnings, mortgage interest rates, currency valuation, inflation adjusted, comparison against other housing markets and real disposable earnings, this article brings to the table housing market analysis against UK GDP growth.

The assumption here is that the value of assets after stripping out inflation should increase in inline with the countries actual growth rate as measured by gross domestic product. While it is not to be taken purely in isolation as is with case of other methods of determining trend, it does however offer an additional window into formulating a long-range house price forecast.

The above graph illustrates that the UK housing market is very sentiment driven, and in many ways exhibits the same sort of behaviour as that of stock market investments moving between extremes of over valuation and undervaluation against the UK 's GDP growth trend.

Despite house prices having fallen by about 7% to date, the trend from an extreme reading of more than 45% above the GDP valuation has barely begun its decline. However this does not imply that house prices could fall by as much as another 50% to reach the oversold state associated with market bottoms as there are two factors which can help limit nominal falls in house prices and contribute to the correction in housing market valuations, those two factors are Inflation and GDP growth.

Inflation is on the rise and destined to hit near 20 year highs later this year, the worry for the Bank of England is that rocketing food and fuel prices may ignite a wage price spiral, where instead of one off hits from high fuel prices, corporations will increasingly give in to high wage demands which are then passed onto the consumers via higher prices which again results in high wage demands and thus the cycle repeats spiraling ever higher as wage price spiral takes hold. In a worst case scenario this can lead to hyper inflation the likes of which we have not seen since the 1970's when inflation soared above 20% per annum. Whilst hyper inflation is not expected at this moment in time, the RPI inflation index could pass above 6% which has the net effect of eroding housing market values by 6% per annum without the need for nominal fall in house prices.

UK GDP continues to grow inline with the Market Oracle forecast for 1.3% for 2008, with 2009 seen as touch and go as to whether there will be a recession, however even there the expectation is for limited downside as Gordon Brown preps the ground for an election by mid 2010. Thus GDP growth over the next 2 to 3 years is net supportive in the erosion of housing martket valuations without a significant fall in nominal house prices.

The most likely outcome is for inflation and GDP growth to erode housing market valuations for as long as the next 10 years towards a state of under valuation i.e. to reach the point where no one will be willing to touch properties as an investment with a barge poll, as happened during the late 1990's which turned out to be a great time to buy properties.

UK Housing Market Analysis:

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 150 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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