|A BULL TRAP IN HOUSING (AND STOCKS) WAS SET IN THE REBOUND OF 2009 - ANYBODY BUYING SINCE ON A PRESUMPTION THAT THE WORST IS OVER IS LIKELY IN FOR A SHOCK|
In my original Financial Report sent out way back in January 2009, I included a chart illustrating the classic timeline of an investment mania. Here it is again, unaltered. It applies to share prices, it applies to house prices. It applies to tulips.
After months of gradually accelerating price falls and a shocker out today, it seems increasingly clear that our 'dead-cat bounce' in housing is well and truly deceased. The illusion of a return to normality persisted for a year and saw prices, in London especially, rebound quite strongly. But it does appear that this was indeed a classic 'bull trap' and that the next extended phase of the decline has now begun.
As the Halifax house price index reveals a 3.6% price drop in the month of September - its biggest monthly fall since records began 27 years ago - an International Monetary Fund report warned that the persistent over-valuation of UK prices poses a major risk to the overall economy.
Prices are 'still too high based on the traditional valuation yardsticks', the Fund said in its World Economic Outlook report. Should interest rates rise many will be unable to meet mortgage payments, but even at current rates a falling market would have serious implications. They cut Britian's estimated growth for 2010 by almost a third, to 1.7%.
|A Romanian trade unionist protests cuts in |
government spending - the country is
heavily in hock to the IMF
With signs of a slowdown in the UK economy already clearly evident, hopes that we can avoid a renewed slump in 2011 - given the fact that government spending cutbacks have not even begun and tax rises have not yet bitten - seem mere wishful thinking. House prices will not be immune, nor should they be.
Indeed, the inevitability of their decline is something to be welcomed, as a return to affordability will finally set the stage for a genuinely sustainable recovery. Absent any major economic shocks (though don't count on it), I anticipate the decline will resemble a process of death by a thousand cuts - which is, as Nosferatu George would doubtless say, entirely appropriate.