Why do I think house prices are about to get worse when today we have had news that the recession is officially over ( – a pitiful 0.1% growth!).
Firstly, the housing market in the UK remains 29% overvalued on a price to rental basis according to the Economist:
Second, in 2008 the interest rates were 5% and have dropped by 90% to 0.5% – the recovery in house prices is pitiful given the reduction in financing costs – with this reduction in financing costs you would expect prices to more than double.
Skipton Building Society have just increased the mortgage rates to 4.95% and many people will be coming off the advantageous deals they have enjoyed until now. There is only one way that rates can go now – upwards and many will feel the pain of increased repayments.
Third, to get through the banking crisis, the government have piled on the debt including over £200bn of quantative easing. Debts will have to be paid and the trading deficit reduced by significant cuts in public sector spending and/or tax rises that will prove a further drag on employment and the economy. These cuts have been delayed by the impending election.
Forth, whilst the government spun the latest reduction in unemployment figures, the truth is that the figures are appalling – they showed a loss of 113,000 full-time jobs, a nasty rise in the number of involuntary part-time workers and yet another fall in real wages.
Fifth, the inflation figure announced recently was unexpectedly high – whilst expectations are that this will drop back, the 30% drop in the purchasing power of sterling means that imports will be more expensive and inflation may therefore prove more stubborn than many people expect, thereby squeezing household budgets still further.
For the last 18 months we have been spared the pain of the deflation of the property bubble through government intervention in the markets – that cannot continue and at some point we have to face the truth. The truth is that we are still in a big mess and property prices must decline back to fair value.
So far we have followed the traditional path of a bubble, where after an initial fall, we go into a period of denial and temporary return to ‘normal’ conditions before the next big slide before we reach the mean level:
My advice to my readers is to remain cautious – we are in the bull trap phase now and what you do now will have a big impact on your future wealth.
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