House price crash - 7 reasons why its not over yet

Monday, 10th August 2009

There's been lots of speculation and conflicting reports about house prices over the last few months. The Royal Institution of Chartered Surveyors now thinks that home values could actually rise and the Centre for Economics and Business Research released a report this morning that said we might get a small rise by the end of the year.

So surely this is good news? The crash is over and we can all stop worrying about negative equity and the slow market? I'm afraid we are not out of the woods yet and a full recovery to the housing market as it was in say 2005 is still at least 3 years away. So why the pessimistic outlook?

Well, I like to be an optimist so lets turn this negative into a positive - house prices will rise at some point in the future. That future in which house prices rise are just a little bit further away than most people would like. Here's seven reasons why the house price crash isn't over yet

1 - Learn From History

In the crash of the early nineties house prices would rise for a few months before falling again. The overall trend was that prices were heading down. Dont forget that the long term trend is a more important than any short term blips. There's no reason why this house price crash should be any different from that of the nineties, so expect to see prices rise and fall over the next year.

2 - How low can you go?

Interest rates are extremely low, in fact so low that they can't really go any lower. These exceptionally low interest rates have helped many homeowners to survive the recession by massively reducing mortgage repayments. The problem is that rates can now only go one way from here and as soon as the economy starts to warm up there will be a lot of pressure put on the Bank Of England to start raising rates. Most people are enjoying the extra spare cash from reduced mortgage payments rather than paying down the debt, so as soon as rates go up, the partying comes to an abrupt end.

3 - Low turnover

According to the Land Registry the volume of housing transactions is still close to a record low. So the low volume of houses on the market is supporting the prices, when volumes start to rise this will increase supply which will put downward pressure on prices, cancelling out any rises in the short term.

4 - Price of Oil

The global economy is under constant pressure from rising oil prices. In July 2008 Oil prices hit record highs of $147 a barrel. Today prices are much lower but are on a very clear trend upwards. A combination of a growing global economy and peak oil will accelerate the upwards trend of oil prices to new record highs.

5 - Quantitative Easing

This is a huge unknown, massive amounts of money have been injected into the UK economy, this will either led to inflation (followed by rising interest rates) or further credit crunch style issues if the money is withdrawn

6 - Public Sector job cuts

Gordon Brown has run the UK is massively into debt and at some point cuts will have to made to the public service sector to help balance the books. As we all know job losses are not good for housing markets.

7 - Downward pressure on wages

UK wages are under attack from two sides. Firstly, the economic downturn puts pressure on companies to reduce costs, which they do by either outsourcing jobs to places like India or simply by cutting wages. The other pressure on wages has been the relentless influx of cheap immigrant labour. In recent years this immigrant workforce has consisted of skilled labour from countries like Poland, again this puts massive pressure on UK wages.

Conclusion

So there you have it, seven good reasons why the crash still has some way to go. My prediction is that we still have at least a year of bouncing along the bottom before we see any real recovery. Despite the doom and gloom, there is light at the end of the tunnel and I remain confident that at some point in the future I will be able to write a post titled "House price crash - 7 reasons why its over"