The U.K. Housing Market Forecast to 2012 (Part 1 of 3)

Recent house price data as released by the Halifax showed that UK house prices have plunged by more than 20% from the peak of August 2007, which has fulfilled much of the original forecast made in August 2007 for a minimum fall of 15% for the UK housing market and 25% for London, therefore this analysis seeks to project the forecast trend for UK house prices for the next 3 years into 2012.

UK Housing Market Background and Re-cap.

August 2007 Forecast Conclusion:

The UK Housing market is expected to decline by at least 15% during the next 2 years. Despite the 2012 Olympics, London is expected to fall as much as 25%. UK Interest rates are either at or very near a peak, as there is an increasingly diminishing chance of a further rise in October 2007. After which UK interest rates should be cut as the UK housing market declines targeting a rate of 5% during the second half of 2008. The implications for this are that the UK economy is heading for sharply lower growth for 2008.

The Credit Crunch Trigger - The first signs of the housing market moving towards an imminent peak occurred in February 2007 following clear evidence that the subprime mortgages were defaulting in ever greater numbers in the United States. The assumption here was that this could lead to an unraveling of the carry trade, which would lead to deleveraging of the credit boom. However the initial financial markets wobble of February 2007 failed to show outward evidence of a credit crunch. Thus the UK housing market continued to rise despite rising interest rates that had been forecast in November 2006 to rise to a peak of 5.75% by September 2007 as the Bank of England would battle with inflation during 2007.

The housing market took off into what would be its final spike higher with many commentators declaring at the time a new paradigm, with many reasons put forward as to why house prices could be supported indefinitely.

Reasons Given as to Why the Housing Market Would Not Fall:

Immigration - There had been a large influx of over 800,000 migrants from the Accession states who contributed towards the buy-to-let market bubble.

Lack of Home Building - Up until early 2007 there had not been a building boom in the UK housing market in the form of traditional terrace and semi-detached properties. However this hid the speculative boom going on in the construction of the off-the-plan flats and apartments that proceeded to transform many city centre developments that were due to be completed during 2007 and 2008. This would bring online a huge supply of over priced properties that would require ridiculously high rentals to prove profitable as frenetic property speculators grossly overpaid for the flats.

Strong UK Economy - The UK economy at the centre of the world's credit bubble continued to outperform mainland Europe, which looked on with envy from the less flexible and more regulated European countries of France and Germany. However, as we find out during 2009, not participating in the credit boom did not help them as many of the European banks become belatedly suckered into buying U.S. subprime mortgage backed toxic securitized debt as one of the last to fling themselves onto the debt derivatives pyramid.

Already dark clouds had starting forming over the UK housing market during the summer of 2007, as I voiced on 1st of May 2007 (UK Housing Market Heading for a Property Crash).

The credit market conditions continued to deteriorate at an increasing rate during the summer months as the spread between the base rate and sterling LIBOR widened. The situation came to a head during July 2007 with the blow of the Bear Stearns hedge funds at a cost of $5 billion and later led to the credit crunch occurring in August 2007. To derivatives market participants, this implied that the housing market could not rise any further under these conditions and had in fact peaked in the month of August, which is what actually transpired on release of subsequent house price data.

UK Housing Market 2008 Crash Trigger - Following the peak in UK house prices, the initial trend was in line with the original forecast. However it was recognised following Northern Rock's bust that the pace of deterioration of credit markets as well as the capital gains tax changes implied that the UK housing market's rate of decent would start to accelerate from April 2008 and could be termed as a housing market crash. As I wrote in November 2007 - Crash in UK House Prices Forecast for April 2008 As Buy to Let Investors Sell:

The timing for the sharp drop is likely to coincide with Labour's change on capital gains tax which effectively cuts the tax payable on gains accumulated over the last few years to 18% from 40%. This tax change comes into force on 1st of April 2008 and thus the expectation is for an avalanche of selling amongst buy to let investors to lock in profits.

This also means that the market will to some degree be artificially supported going into April 08, but still will not be enough to prevent a wider decline in UK house prices but rather could register a drop of as much as 5% in the quarter April 08 to June 08 , which would represent a crash in UK house prices.

July 2008 - UK House Price Crash In Progress! - The summer months subsequently witnessed the crash in UK house prices come to pass as house prices look set to fullfill the original forecast for a 15% fall well ahead of the original timeline with the risks that despite soaring inflation data. The housing bear market threatened imminent deflation, which has now increasingly become the mainstream story, originally highlighted in the analysis of March 2008.

The Government Starts to Panic - House prices continued to fall into September 2008 as increasingly bankrupt banks started to topple over one after another as governments scrambled with ever more panicking measures to prevent a collapse of the global financial system. First came the ban on short selling of financial stocks, then nationalisation of Bradford and Bingley, followed by the panic interest rate cut of October 2008, and the unprecedented £500 billion bank bailout package.

As the financial markets continued to experience extreme volatility by registering daily movements of as much as 10% that have not been seen since the days of the 1987 Crash, the Government effectively took control of interest rates in all but name away from the Bank of England. The BOE announced the panic interest rate cut of 1.5% at the November MPC meeting that truly brought home how quickly the economy was falling off the edge of the cliff. The subsequent emergency VAT cut was an attempt to get consumers to spend immediately, which brings us up to the present.

HBOS (HBOOY.PK) - Britain's Biggest Mortgage Bank

In August 2007, I warned about the precarious state of Northern Rock Bank and how the prospects for its survival during the the imminent housing bear market were not looking good. Fast forward 12 months and we found Britain's biggest mortgage, the Bank of Halifax, a financial institution that lies at the very heart of the British housing market, teetering on the brink of collapse in mid September under a fierce hedge fund short selling assault that smelled blood for the third time this year. The first time was way back in March 2008, with analysis of the latest assault published a good 24 hours before the mainstream press began reporting on the HBOS crisis. It was the short selling of HBOS towards financial oblivion that forced the FSA to ban short selling of financial stocks some 3 days later.

The HBOS Share price has crashed by over 94%, and is indicative of the severe nature of the current housing bear market, trading at just 73p. The once mighty HBOS has now become another penny stock, with the value of shareholdings further diluted via state capital injections to keep the zombie bank from flat-lining.

Vested Interests Try to Talk the Market Higher

To date the Nationwide and Halifax have not made a forecast for 2009, which is not surprising given the failure to date to accurately track the housing market decline. All mortgage banks have a vested interest in talking up the market, just as transpired in the early stages of the 1990's housing bear market ,as I highlighted in the September 2007 article - UK Housing Market on Brink of Price Crash - Media Lessons from 1989!

The whole of the decline for 2007 was associated with the phrase 'Soft Landing', which continued into early 2008 after which the phrase disappeared from the mortgage bank press releases. Still, in early 2008, Halifax continued to imply that UK house prices would not turn negative during 2008. On the other side of the equation were the perma-bears such as Capital Economics which had been repeatedly calling for a 20% to 30% drop in UK house prices since 2002.

For Part 2, click here.