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A cheer went up amongst housing
market participants across the land as UK house prices rose by nearly 1% in
January 2009 as measured by the Halifax. However the government is throwing
everything including the kitchen sink at the housing market to bring about a
halt to the ongoing crash in nominal terms. The amount of money printed has
mushroomed from the £50 billion of April 2008. that I warned was just the tip of the ice-berg that would
soon mushroom into the hundreds of billions, we are now in the process of
leaving the hundreds of billions behind and moving into the trillions, sums
that seriously risk the bankruptcy of Britain.
The mainstream media
has jumped on the one month bounce to start contemplating the return of the
housing bull market i.e. The Times reports - The 10 towns where house prices will bounce back first - " Property
website's recorded a surge of activity in the first few weeks of this year,
estate agents had a busier January than previous months and Halifax even
reported a small rise in house prices."
UK Housing Market Affordability
and Interest Rates
The February rate cut
to 1% fulfills the forecast target for 2009 (4th Dec 08 - UK Interest Rates Forecast to Crash to 1% ). with the next stop
a similar Zero Interest Rate Policy (ZIRP) as that adopted by the United
States that have cut their interest rate to 0.25%. The deep cuts in interest
rates whilst not wholly passed on have resulted in a fall in the economic
rate of interest from over 6% in September 2008 to 3.54% today. This is
having a positive impact on the affordability despite the recession and hence
supportive of house prices in the short-term.
 
UK House Price Forecast 2007 –
2012
The rise in UK house prices during January 09 brings a pause to the house price crash that is now into
its 18th month as the above graph illustrates as per the updated
house price forecast that covers the trend into 2012 which projects for a
total drop from peak to trough of 38%. However, as I have warned many times
over the past 18 months, the government has in its power the ability to print
money to bring nominal house price falls to standstill, this money printing
is now quaintly termed as "Quantative Easing" so as to hide the
truth and mask the continuing crash in house prices that despite the opinion
of the mainstream press by the likes of Anatole Kaletsky and Ambrose
Evans-Pritchard HAS put Britain on the path towards bankruptcy, as explained
in the depth analysis of November 2008 - Bankrupt Britain Trending Towards
Hyper-Inflation?
The Labour
governments primary objective remains to maximise its chances of winning the next
election, this will be to the detriment of future growth as the consequences
of printing money and the exploding debt burden risks a currency crash that
at best means many years of stagflation and at worst hyperinflationary
bankruptcy along the lines of the Weimar Republic and the most recent example
of Iceland. This is evidenced by the following graph of UK house prices in terms of inflation, and our key trading partner the United States (U.S. Dollar),
with a similar fall observed against the Euro.
The above graphs
clearly illustrate that the UK housing market has crashed by 25% (real terms)
and over 40% (U.S. Dollar / Euro) which is having a severe impact on the UK
economy as the real deflation of a 40% loss of value of house prices added to
the more than 50% of that of stocks is tipping the UK economy towards
economic depression. Therefore home buyers need to guard against the ILLUSION of stabilising house
prices whilst the real terms crash in house prices continues.
UK House Prices Regional Trends
While average house
prices as of December 2008 are down 20%, in terms of price crash experience
Northern Ireland tops the list at 35%, meanwhile Scotland continues to buck
the trend by only registering a 6% drop to date.
Deflation of 2009
Will Eventually Turn to Inflation
My earlier analysis
of the UK inflation concluded that the UK is heading for real deflation
during 2009, with the RPI inflation measure expected to go negative by mid
2009 by targeting -1.2% . The expectations are for similar deflation across
the world, as deficit spending stimulus packages cannot hope to compete
against the loss of asset values which are in the order of ten times the
amount of planned stimulus. The analysis also concluded that the immediate
risks to the forecast are to the downside i.e. prices spiking lower than
expected.
This therefore
implies for short-term support of the housing market and for further stimulus
packages far beyond that which have been committed to date, with all of the
associated consequences of a collapse in sterling under the weight of growing
deficits and liabilities which sets the scene for higher future inflation as
the deflationary impact of collapse in crude oil during the second half of
2008 starts to leave the inflation indices during the second half of 2009,
thereafter the deflationary forces of contracting economies will compete with
the inflationary forces of money printing and rising commodity prices which
will further put house prices under increased real terms pressure.
For more on the
impact of deflation, download the world's foremost expert on and proponent of
the deflationary scenario, Robert Prechter's FREE 60-page Deflation Survival eBook or browse various
deflation topics like those below :
The question that now
needs to be answered is how far will UK's GDP contract during the current
recession, as that will determine how bad the housing bear market will be in
real terms. The indepth forecast for the UK recession is underway, to receive
this in your email in box on the date of publication subscribe to my always free email newsletter.
Nadeem Walayat
Market Oracle.com.uk
Nadeem Walayat is the editor of
MarketOracle.co.uk.and has over 20 years experience in trading and investing.
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