house prices: the market bites back
08 May 2008
In the last 30 years the price of an average house has risen by 15 times in the UK, by 9 times in France, by 8 times in Australia and by 6 times in the US. And this period includes the major asset price bust that took place in some of these countries in the late 1980s. During this same 30 years, inflation has been approximately 350% in the US, so that house prices have risen at nearly twice the rate of prices in general, and more in other countries.
Economic theory and past experience both dictate that such bubbles come to a sad and painful end, so it is no surprise that the US housing market has now turned in on itself, beginning with the collapse of the 'sub-prime' mortgage sector, and spreading now to most - but not all - of the country's regions.
History tells us that economic trends usually begin in the US and then impact other parts of the world. Some commentators are telling us that China will act as an economic counterweight to the US, and while that may be true in general terms, so that there is not much chance of an overall global slump, it's hard to see that China's success will do anything much to prevent the puncturing of the housing bubble.
US house prices have fallen about 15% since their peak in 2006. While it's impossible to predict their future course, with US economic indicators jumping about wildly every day, there are plenty of respected economists from Alan Greenspan on down who see further falls ahead, and an overall drop of 30% cannot be ruled out.
In the UK, lagging the US as is traditional by one to two years, prices have now been more or less flat for a year, with falls confidently predicted for the remainder of 2008. There is a similar picture in the other main markets.
Don't be surprised to see double-digit falls in UK house prices in the next few months. And if that happens, then there will be knock-on effects in the various countries which have seen an influx of equity released from over-priced UK houses particularly around the Mediterranean and in Bulgaria and Romania.
Many people may feel that this is no time to make house-buying decision. Are they right? No-one should try to offer definite answers to such questions; but in this special feature we will try to outline some of the facts, factors and trends which a purchaser (or a seller) ought to take into account before making a momentous decision which may affect financial well-being for decades to come.