There are varying predictions about the direction house prices will go in the coming months and years.
It’s possible to approximate the anticipated extent of the house price crash by analysing graphs of previous housing crashes.
Provided the crash is comparable to previous crashes in terms of market conditions and contributing factors it may be a reasonable way to predict one possible outcome.
Let’s look at a graph!
The most recent crash in 1989 took 7 years to reach its trough and 13 years to return to its former highs.
But the crash in 1980 only took 2 years to reach the trough and 5 years to bounce back to former levels.
So what are we facing? A long sustained drop in house prices or a quick ‘correction’?
It’s not possible to predict from looking at one graph when there are so many contributing factors but one which I think plays a bigger part than others is the ratio of house prices to earnings.
The ratio is calculated using average house prices and average income figures.
According to Halifax: ‘The house price to earnings ratio – a key affordability measure – is at its lowest for six years. The house price to average earnings ratio has declined from a peak of 5.84 in July 2007 to an estimated 4.42 in February 2009; a fall of 24%. The ratio is at its lowest level for six years (February 2003: 4.41). The long-term average is 4.0.’
So for the ratio to equal the long term average of 4 it needs to drop another 9.5%
House prices are already down 21% since the peak in 2007 so another 9.5% makes 30.5%.
The National Housing Federation justifies its claims of a 25% increase on the basis that there is a huge demand for housing in this country and the natural laws of supply and demand will bring about a reversion to the current decline.
But one more very important factor is driving the current decline and that is the availability of credit.
9 US banks already claim to be able to repay their bailout money to the government and Northern Rock repaid half it’s loan early so is this a good sign?
Lloyds Banking Group are closing all the C&G branches and threatening another 1500 UK jobs which doesn’t look good but that’s because they made a bit of a poor judgement call when they bought HBOS and not just due to continued economic decline.
House prices needed to drop. They were getting silly and what we are seeing is a very swift correction.
It looks like banks are picking themselves back up and dusting themselves off already and there are some very attractive introductory savings rates being offered. (Abbey 6% for the first 12 months on balances up to £2500)