If Mervyn King's forecast is right, a collapse of the housing market seems certain
Copyright 2004 Newspaper Publishing PLC
The Independent (London)
April 17, 2004, Saturday
WILLIAM KAY
If Mervyn King's forecast is right, a collapse of the housing market seems certain
IT IS a rich irony that, while more and more people are looking to the value of their homes to get them out of debt and give them a pension, we now know less than a jar of fresh air about what is going to happen to house prices.
This week Tony Dye, a discredited analyst who basks in the nickname Dr Doom, predicted that house prices would fall by 30 per cent. He was backed by Andrew Oswald, professor of economics at Warwick University, and Gavin Cameron, research fellow in economics at Nuffield College, Oxford.
These views are widely at odds with Halifax bank and Nationwide building society, which have had to upgrade their forecasts for this year from a rise of less than 10 per cent to a gain of around 20 per cent, similar to the 2003 outcome.
This range of forecasts means that a pounds 200,000 property could be worth anything from pounds 140,000 to pounds 240,000. Thanks, guys.
As a poll for The Independent showed this week, most pundits lean towards the optimistic end of the scale. Many are too closely involved in the housing market, either as estate agents, surveyors or lenders, to be objective. But the most worrying view for house owners - and therefore the most cheerful from the view of would-be buyers - is arguably the high priest of finance, Mervyn King, governor of the Bank of England. The Bank's view for some time has been that house price rises will slow down to the point where they reach standstill. As chairman of the Bank's Monetary Policy Committee, responsible for setting UK interest rates, Mr King can do more than most to ensure his prediction comes true.
If zero house price inflation is likely, we then move into views about how markets behave. I do not believe that market-driven prices are neat and tidy, and while zero is a nice, round number prices are no more likely to stand still than they are to grow or shrink at a steady 10 per cent.
If Mr King's forecast is correct, the corresponding transfer of power from house sellers to buyers will almost certainly spark a collapse and falling prices. How far and how fast will be very difficult to predict, because it will be inherently volatile, as it was in the early 1990s.
It could be that Mr King's forecast is slightly too grim and we simply see a slowdown to house price rises of around 5 per cent, much in the same way that overall retail price inflation has declined from peaks of over 20 per cent a year. That will be much more benign, even for home buyers. What they will lose in terms of prices staying higher than in a crash will be compensated for by greater stability. This should mean a greater supply of properties onto the market, and a more relaxed stance on the part of lenders.
This is the so-called Goldilocks scenario, whereby the housing market becomes not too hot, not too cold, but just right. The trouble is, it rarely happens. Greed and fear tend to yank prices about more roughly than that, which is why so much responsibility rests on Mr King's shoulders to ensure that interest rates rise neither too quickly nor too slowly.
THE LONDON letting agent Ludlowthompson.com says that buy-to- let is becoming more popular with women, although it is not sure whether this is a result of fury at the lousy pension deal women get or their desire to emulate the TV programme Changing Rooms by having a property to do up. I hope it is the latter, for rage is not enough for buy-to- let. Conversely, the buy-to-let investors who tend to be most successful are those who take a direct interest in their properties, even if they do not decorate and maintain them themselves. Unlike shares, where investors pay a board of directors to manage the business, the ultimate responsibility lies with the investor. And that may be where women score.
You can email me at Gavin.Cameron@economics.ox.ac.uk
Last updated: 17 April 2004.
