Aug 062011

Last updated: 20 Aug 2011:
We are attempting to project likely outcomes for the housing market, by looking ahead of the curve and into the future.

Now that the USA has had its credit rating downgraded and the Euro is at maximum stretch for survival, what are the real prospects for house prices in the UK?

Financially, times are tough right now and things aren’t likely to get much better as far as one can see by trying to guess what’s over the horizon.

However, to better understand things, with reference to house prices, and to get a glimpse of what comes next, we need to gather the most critically important pointers together and see what they may indicate.

Analysing what happened in past decades when we were faced with similar conditions, is a vital part of the toolkit.
Knowing what Governments have done to change the economy, since the last big shake-up occurred, is the secondary key to knowing what will, or is most likely to happen next.

Recent market research suggests that house prices will remain weak for some years, because of squeezed disposable incomes and tight credit conditions.
However, this assumes that the economic corner-posts of our Nation’s stability, stay in place and weather the storm. What if they don’t?

Unfortunately, there are certain key issues that are liable to deflect the economy away from this - the preferred and safest prognosis.
This deflection last happened in a big way in the 70’s. Unfortunately, all the indicators are in place for a repeat of this, because not enough has been done to really strengthen our country’s position in terms of economic growth since then.

To summarise, the primary factors impacting on the situation are: -

DOWN EFFECTS (or the effects causing and/or resulting in delayed recovery and prolonged economic weaknesses)
Allowing a continuance of the unbridled growth of the population of this island
Shortage of money in the economy, both in terms of the level of earnings and in the reducing level of people’s savings
Reduction in consumer spending
Falling value of Sterling itself
Low interest rates, necessary to try and sustain economic growth and a strong likelihood that they will need to subsist. This further adds to a fall in the value of Sterling
Falling share prices (and uncertainty, demonstrated by the excessive volatility of certain key stocks)
The apparent need for further Government spending cuts and tax increases

Coupled with:
Reduced manufacturing for exporting, despite the low value of Sterling (It’s absolutely vital this is reversed)
Reducing employment opportunities (especially if the global trade downturn continues)

UP EFFECTS ( on the housing market, or the effects giving rise to the need for people to move their savings out of Sterling or Sterling related investments)
Inflation in our economy
Food and clothing prices rising (especially products imported from Asia, because inflationary pressures there have been causing price increases for some time and these are likely to continue)
Fuel prices rising further (again fuel is mostly imported)
Falling value of Sterling (However, as well as being a down effect, this could also result in money from abroad, from foreign investors, going into UK property)
Stubbornly high asking prices for houses themselves (owing to the public being genuinely concerned about the economic situation and wishing to hedge against it!)
Uncommonly high gold and other precious mineral prices
A high likelihood of continuing uncontrolled inflation (and/or of a further devaluation in Sterling) and the need to hedge against it

ALL of these factors point to a probable loss of confidence in the state of the economy, and hence a desire to find as safe a haven as possible for one’s savings and investments.

In such extreme conditions, and they have been extreme owing to the absence of significant economic changes put in place by Government to stop these effects re-visiting our economy, what is likely to happen? By definition, the same things as before are almost certainly set to recur, namely: -

With an impending risk of another financial collapse, individuals will pile their dwindling assets into:
Gold, land and houses.

Cash-rich buyers will come along and buy the best houses as live-in investments and retain these for the duration of the downturn. Some will be bought for buy-to-let investments in order to provide the additional prospect of receiving rents, to further hedge against probable inflation.

For these reasons alone, we forecast that those buying the better quality reasonably priced houses today, will see the values of these investments out-perform all monetary savings plans, including the stock market over the next 10 years.

Also, we strongly suggest that there is continued pressure for housing, as our island’s population is still increasing at an alarming rate, and hence the general demand for houses will continue to increase simultaneously, certainly in the medium term.

Better quality houses are therefore an extremely good buy currently.

If ultimately, the demise of the Euro is a ‘fait accompli‘, this would add considerable weight to the suggested outcome for UK house prices as forecasted in this article.
Our question to our readers then is; If the Euro should actually collapse, are we correct about this outcome?

Prices of the ‘better buys’ can only start going up if sufficient numbers of cash-rich buyers start competing to buy these. Will this happen?

Updated 2nd Aug 11:
[Reuters] The IMF said at the beginning of August, that should the UK economy appear likely to experience a prolonged period of weak growth and high unemployment, and a lowering of the rate of inflation as a consequence, then quick action would be important.

Further quantitative easing by the Bank of England and temporary tax cuts might then be the outcome.

We say, IF this scenario were to be played out - on the ground - as it were, it would be a question of ‘steady as she goes‘ (shipping expression), concerning a rise in the value of residential property as an additional form of investment.

We say that in these conditions, house prices should stay solid and not collapse.
That already seems to be happening currently, which seems to add weight to our argument at present.

The ultimate reason, which is supporting this argument, is that there is a chronic shortage of housing, (or a quickening in the level of demand for it) depending upon how you prefer to look at this. No government, not even this one, could suddenly build enough houses to overcome such a shortage. That would take years to do - far longer than several terms of office of any elected government.

Factoring this in, the result of the equation can only be, sustained and/or increasing house prices; especially in the longer term and relative to most other forms of investment.

Therefore the time to start buying is soon, assuming that prices have, or are about to have, bottomed out.

Posted by: Property Match (UK): The modern way to market houses