House price declines accelerate

With the last cheer leaders for the housing market finally giving up their rose coloured predictions for the housing market, the market fell at its fastest rate for many years in September according to Home track. September saw a fall of 1.3% according to the hometrack data.

The forward looking picture is equally bleak. With a leading economic think tank, the CEBR predicting that it could be as late as 2013 before prices start to recover from what they say will be a 25% peak to trough decline. But…there is a ray of light at the end of the tunnel.

The current issue with house prices was unsustainable when measured in normal ways….against anchors for house prices like wages, rental yields etc. There is no doubt that the elastic ban had stretched too far in the expansion of prices and now looks to be snapping back. Gordon Browns suicidal attempts to reflate the economy through a huge spending program could actually have a perversely positive effect for house prices.

His huge monetary expansion to bail out anyone who drives a Ferrari may lead to another housing boom….but in actual, not nominal terms. Once the current deflationary headwinds subside as the credit expansion roars into reverse, once the system is purged of all the mal investment and excessive risk that caused the issues we now face, there will be a different type of flation….inflation…and it could be severe.

The bank bailouts and the other measures to spend the economy out of the hole we find ourselves in, even though it’s absolutely discredited by most thinking economists, will force inflation into the system a couple of years down the road. If that inflation feeds through into wages, which admittedly isn’t a given, it could provide a cushion under house prices as rental yields and home prices adjust to factor in higher wages.

If Darling and Brown get their sums wrong and the inflation gets out of control, it could push house prices up to very high levels and shrink proportional mortgage debt in nominal terms. Should this happen, house holders will be OK with their mortgage debts, but they might be hungry.

• Simple Energy Solutions That Save Big Money As energy prices go up, many people are looking to...
• Mortgage rates on the rise again. After mortgage rates dropped to record lowsa few weeks back,...
• Who is to Blame for the Credit Crunch? There are many lenders currently under investigation for fraud, perhaps...

Tags: Alastair Darling, Credit, Gordon Brown, House Price, Housing Boom