One of the main measures we in the UK use to measure the strength of our economy is the state of the housing market. Whether this is a correct measure to use is debatable. But the fact remains that people feel good as the perceived value of the house that they own increases, so do their feelings of security and prosperity. For the last decade or more, until 2007, we saw residential house prices go up inexorably. The crashes of the past were forgotten as people ploughed more and more of their cash and future earnings into the bricks and mortar that surrounded them and their families.
As with any asset bubble, coolly standing back and assessing the situation was seen as ‘not applicable in this particular scenario, it is different this time’. There was even talk of house prices reaching multiples of twenty times the average wage only 3 years ago. Absolutely preposterous when you look back on it now in the cold light of day.
So what of the coming year? Will your house recover some of that lost value? Will you be able to move or perhaps buy your first house? Or are you still in denial and believe that your house and area are different?
In the UK, maybe more than in any other country, we have a belief in houses as investments. Houses, it seems, are assets not places to live and bring families up in. Many people will do whatever it takes to own their own house. It is a sign of growing up, of success in life and most of all a sign of fitting in.
Owning is also seen as less expensive and more secure than renting. Once again, this may not always be true. But when renting the longest term you can be assured of a place is generally six months and you can usually be given just a month to clear the place. I do not call that secure. Also, when you are retired, do you want to live in a house you own outright? Or in a place with insecurity and rent to pay on top of that?
That is why the availability of money is tied so closely to house prices in the UK. As soon as prices drop even a bit there is a developer or potential owner/occupier with the money who thinks the time is right for them to buy.
There will be little in depth analysis about the pros and cons of buying, other than ‘can I afford to live there and pay the mortgage?’ Their job security will have little bearing and if they can’t afford insurance other than to cover the building, well let’s sort it out later (never).
Next year we know that VAT will rise and the Stamp Duty Land Tax (SDLT) ‘holiday’ for residential house purchases will return to its previous levels on 1st January 2010 (1% for properties between £125,000 and £250,000, as opposed to between £175,000 and £250,000 as previously). This will make property transactions pricier than the recent past.
There is also expected to be an increase of property on the market next year but no real increase on bank lending. Yes, the banks are under pressure to lend, but they are also under pressure to increase liquidity to prevent another crunch. The two are not wholly compatible. No lending, no mortgages. The banks are also facing huge write downs on their commercial property holdings and related loans.
There are also mutterings of higher local and central taxation as well as pulling back of public services. The former takes disposable income out of your pocket and the latter means lower public sector employment and wages and possibly more importantly the public sector will not be ordering so much stuff from private manufacturers. Overall unemployment is also (conservatively) expected to touch three million. All this means potentially less tax collected and more dole payments made. Leading to a greater public borrowing requirement.
The liquidity injection of quantitative easing also has to be stopped and reversed at some stage as well.
With the IMF and credit rating agencies such as Moodys and Standard & Poors on the UK’s back about sorting its debt out to maintain its AAA status, 2010 will prove to be an ‘interesting’ year.
The UK has been given time, but only until the election, which must take place within six months or so. The incoming bunch must quickly forge a plan or the international community may drop our debt (Gilts) like a hot potato. That would not be good! This will mean almost immediate higher taxes and massive public sector cuts. The longer we leave this the worse it will be.
The downward pressure on the housing market will be immense. More people with distressed house sales, but less money for others to buy them, unless the prices are bargain basement. The only thing that will keep it up will be people refusing to sell and holding on to them in the hope they get the ‘right’ price.
But one of the more unforeseen aspects of this is a huge reduction in workforce mobility. Without a relative ease of moving house, workers cannot get to where the work is. This does not help an economic recovery.
Once all this has worked its way through the system I would expect to see a 20% drop in real prices (taking inflation and the state of Sterling into account) over 2010, possibly with further slides on the way after that.
But look out for those local and national blips in average prices that the vested interests will latch onto and trumpet from the rooftops. But remember, they make money from churning houses through the system. You’ve got many years to regret a wrong decision to buy.