A friend of mine is a financial analyst. This is what he thinks of the market. I'd be interested to hear others opinions of this opinion:
"I believe what we are seeing is a classic 'bull trap'. Have a look at the linked diagram below and it will help explain what I'm getting at:
There has been a speculative asset bubble in housing over the last six years, and all asset bubbles follow a very similar path to each other, be it stock markets, oil prices, tulips (in the 17th century - look it up) or houses. Following very, very strong price rises, there is an initial correction period in which prices come back a little. Then, investors generally want to believe that the fall is over. People regain confidence, both believe and want prices to go up, because it is in all owners interests that they do, and investors get sucked back into the market. After that, the market collapses properly.
I think we are at the point before the market falls again - the 'bull trap' on the diagram. My reasons for thinking this are as follows:
i) mortgage books are contracting. In 2007, half of all mortgages were funded via the securitisation market. This market has collapsed and will not return. Mortgage books are contracting in size and overseas lenders have withdrawn from the market. When liquidity is withdrawn from markets, asset prices fall. There is no replacement liquidity to push prices any higher going forward.
ii) structural rise in unemployment - the economic shock from a 8% fall in GDP in this country will take its toll on unemployment. Unemployment probably won't peak for another 18 months. High unemployment leads to increased supply of property (people sell as they lose their jobs) and reduced demand (household incomes collapse).
iii) higher taxation - after the election there will be very, very large tax rises on everyone in this country to pay for the budget deficit. The budget deficit is the largest it has been since WW2. If basic rate of income tax goes up to 30%, VAT goes up to 25%, CGT allowance is scrapped and 20p extra duty goes on litre of petrol, even then every hospital and primary school in the country will have to close between Wednesdays and Sundays in order to balance the books over a ten year period. We are about to enter a period of shockingly high taxation and this reduces disposable incomes. House prices are positively correlated to movements in disposable (after tax) income and it this that partly drove the market higher over the last 10 years (along with the securitisation market).
iv) rising interest rates - over the next 2-3 years it is likely that base rates will rise to 6, 7, maybe 8%. This will choke off any housing recovery by reducing disposable incomes. Long term mortgage rates have already started to rise. Property prices are negatively correlated to interest rates - they are a quasi financial asset.
The Government is storing up additional trouble by schemes such as the Mortgage Protection Scheme which runs for from June 2009. This defers repossessions for 2 years meaning that the supply of property is lower than it would normally be at this stage of the economic cycle. This is helping to create a shortage of property at the moment, and it is exacerbated by people believing that the market will go up again so they will be able to sell at higher prices. This is helping to drive prices up in the short term, but the rise will be capped because there will be increased supply of property if it continues.
All these factors will come to bear very heavily on the property market over the next 2-3 years"
Crikey - not very positive really.