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So Where Is This House Price Crash?

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It's not easy being a property bear.

Although price growth in the housing market has slowed to a crawl, it can sometimes seem that the procession of greater fools just desperate to get their fingers burnt in buy-to-let is never-ending.

That's why it's worth revisiting the fundamentals from time to time. A couple of months ago, that's just what MoneyWeek economist James Ferguson did.

Allow him to remind you of why we're so bearish on the property market...

Regular readers of MoneyWeek might remember that I’ve been warning about an impending housing slowdown in the UK since my first article on the subject appeared in May 2004.

By most measures, the year-on-year rate of house-price appreciation peaked the following month, in June 2004. Since then, house price growth has headed south but has only ever gone into negative territory in real (inflation-adjusted) terms. Most housing bears have got bored, hung up their spurs and gone away.

But I’d like to remind readers that the last housing crash happened over a seven-year period, much like a falling line of dominos.

So far, our domino effect has halved mortgage equity withdrawal, the rate of personal spending and economic growth in the space of just a few months.

Arguably, the contagion has been halted by the Bank of England cutting interest rates to 4.5% last August. But consumer price index inflation is at the top of the Bank’s allowable range and rising, there’s a global trend towards monetary tightening and, most worrying of all, the contagion has spread to the United States.

The Anglo-Saxon housing markets all rose together, buoyed by a wave of cheap and accessible credit. Now there are signs of a concerted, possibly even coordinated, monetary tightening by the world’s central banks, maybe they will all explode together too.

So far, the bubbles in Australia and the UK have deflated, if not exactly burst, but US house prices had continued to rise. Until now.

The data for sales of new family houses in the US in February was shocking. US new home sales fell 3.4% to an annualised level of 1.08 million and prices were down 2.9% as higher interest rates started to bite.

In the economically vital Western US, new home sales in February plummeted 29% compared with the same period last year. According to David Rosenberg at US investment bank Merrill Lynch, in the last 30 years there have been eight such double-digit drops in new home sales. Six times, these drops signalled recession the next year and one drop led to GDP growth halving from 4% to 2%.

Only once in 30 years did such a sharp deceleration in new-house sales not lead to an economy-wide slowdown – and that was in 1987, when for most of the year there was a huge boom in equity prices. With US GDP growth currently at 3.2% and a flat equity market, it seems the Fed’s 3%-3.5% growth forecast can only be revised one way: down.

The truth is that while Americans have been building new houses so fast you’d think house building was going out of fashion, they haven’t been able to sell them nearly so easily.

US privately owned new house building starts were up 15% in January compared with December – to the highest level since 1973 – but the National Association of Realtors’ inventory data for existing homes for sale is at a two-decade high of nearly three million dwellings.

New-built home inventories are now at a record 544,000 homes, equivalent to more than six months of sales. At a median price of $230,400, the total value of this unsold inventory overhang is an almighty $125bn.

US economic growth might seem quite strong over the next few weeks as first-quarter personal consumption figures are reported, but this is mainly due to a very weak fourth quarter, caused by weather-related factors. Behind the scenes, the debt-financed spending spree is being stretched to breaking point.

With new Fed chairman Ben Bernanke keen to show his inflation-fighting mettle, and with headline inflation figures at 13-year highs, the financial markets are, understandably, betting that interest rates will keep rising.

The European Central Bank is joining in and even the Bank of Japan has announced an end to its “zero-interest rate” policy – so we are suddenly living in a global tightening environment.

And it is happening just when everyone’s guard is down, when stockmarket volatility expectations and investors’ cash positions are both at new lows and when higher-risk assets – such as emerging markets – have been performing well.

That could all be about to change.

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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