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UK Housing Bear Market Threatening Economic Deflation

Housing-Market / UK Housing Jun 27, 2008 - 01:46 AM GMT

By: Nadeem_Walayat

Housing-Market Best Financial Markets Analysis ArticleMay saw another sharp plunge in UK house prices towards what is likely to be termed as a mini-crash in UK housing market for the quarter April to June 08. Many homeowners who bought early into the current boom may be consoling themselves with having built up an healthy level of equity that is able to weather the downturn in UK housing market, after all someone buying 10 years ago would have racked up gains of over 180% to the 2007 peak and even after the initial forecast for a 2 year bear market if 15% would still stand to be some 140% richer.


However, as this analysis which is one of a series of articles in preparation for the extension of the existing 2 year housing market forecast to beyond August 2009, seeks to compare nominal house price gains against real-terms house price gains and the deflationary consquences thereof. The importance being on the impact on housing market sentiment, as it will not be for much longer where inflation is ignored as an important factor in the purchase of properties as it has been for the last 10 years of the UK's housing bull market.

Following the bottom in house prices in 1993, the UK housing market remained stagnant until 1996 when house prices stopped falling in inflation adjusted real-terms which is when the real low in the housing market was made. However despite the 1996 low, inflation had the effect of eroding the subsequent gains in house prices right into 1999 even though house price indices had recovered the losses in nominal terms, in real terms house prices were far away from their 1989 peak and therefore the bull market was slow to gain momentum.

As the housing market approached the 1989 peak in real terms during the bull run of 2002 which was ignited by interest rate cuts following Sept 11th, it was perhaps only at that time that inflation no longer became a significant factor in determining property purchases, much as it is today. The following 4-5 years experienced a large real terms gain of 52% above the 1989 peak. However the housing market is now not only falling at the rate of 7.5% per annum in nominal terms, but the inflation adjusted decline is at the approx rate of 12.5% per annum, implying a 24% drop over 2 years. This will see much of the real-terms gain of 52% over the 1989 peak evaporate to just 17%, with further real-term declines over subsequent years to be elaborated upon in the August forecast update to further erode this gain to virtually zero or worse.

This is highly deflationary and has serious consequences not just for the UK housing market but for the UK economy, as the housing market deflation will further erode the stability of the banking system and credit markets for many years. Whilst the Bank of England seems desperate for inflation not to take off at this point in time as a consequence of the wage price spiral. We may actually see the Government and the Bank of England adopting inflationary policies during the second half of 2009 i.e. in an about turn so as to prevent deflation from taking hold that would lead to a downward spiral in asset prices and economic activity.

Yes, the recent rise in the oil prices is inflationary, however they are a one off shock at the time they occur, meaning that in 12 months time they as if by magic disappear from the year on year inflation indices, however what permanently remains is the deflationary impact as they act as a permanent tax on the consumer unless the consumer demands higher pay which risks a domestic wage price spiral. 2009 is definitely going to be a tough jekyll and hyde year where the first half will be the fight against inflation followed by the second half fight against deflation, where the forces of deflation as witnessed by the Great Depression are far more destructive.

More Analysis of the UK Housing Market:

24 Jun 2008 - UK Housing Mortgage Meltdown for Purchases and Equity Withdrawals
23 Jun 2008 - UK House Prices GDP Adjusted Real Trend Forecast
26 May 2008 - US and UK Housing Bear Market Trends
22 May 2008 - Council of Mortgage Lenders 2008 Housing Market Forecast Demolished
08 May 2008 - UK House Prices Tumbling- Interest Rate Conundrum
21 Apr 2008 - Bank of England Throws £50 billion of Tax Payers Money at the Banks
17 Apr 2008 - Credit Crisis SCOOP- LIBOR Is Now Irrelevant to Derivatives Pricing
08 Apr 2008 - UK House Prices Plunge Over the Cliff
01 Apr 2008 - How to Fix the Credit Markets
11 Mar 2008 - RICS Data Confirms UK Housing Market Heading for 1990's Style Crash
03 Mar 2008 - Credit Crisis Morphs Into Stagflation- Protect Your Wealth!
26 Feb 2008 - UK House Prices Fall for 5 Months in a Row- Housing Market Will Go Negative April 08
07 Feb 2008 - UK Interest Rates Cut to 5.25% - Will Not Help the Housing Market
21 Dec 2007 - UK Commercial Properties Crash Looms as Property Investment Fund Frozen
07 Dec 2007 - Analysis of Interbank and Base Interest Rate Spread
05 Dec 2007 - UK Home Owners Unable to Refinance Mortgages As Fixed Rates Expire During 2008
02 Dec 2007 - UK Housing Slump Gains Momentum as Properties Fail to Sell at Auction
10th Nov 2007 - Crash in UK House Prices Forecast for April 2008 As Buy to Let Investors Sell on Capital Gains Tax Change
28th Oct 07 - UK House Prices - Primary Reasons For a Sharp Fall
25th Sep 07 - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!
22nd Aug 07 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth
1st May 07 - UK Housing Market Heading for a Property Crash

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

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

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

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.

Attention Editors and Publishers! - You have permission to republish THIS article. Republished articles must include attribution to the author and links back to the http://www.marketoracle.co.uk . Please send an email to republish@marketoracle.co.uk, to include a link to the published article.

Nadeem Walayat Archive

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Comments

Jason Truth
27 Jun 08, 21:39
Economy

We are in for a very bad recession bordering on a depression. Take note of all the factors: Tanking real estate, historically high oil/gas which is going higher, increasing unemployment with highest increase, US dollar a mess, tanking real estate....wait until the cold season with double prices heating fuel. Hang on my friends, this is absolutely going to be hell !


Maica
30 Jun 08, 20:43
House Prices

Wow! Great stuff, Nadeem. It reminds me of this other site I found. It also has great coverage of house prices/trends of the international market.

www.globalpropertyguide.com


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