House prices on the UK – on the slide?

Confession

This piece is one of my occasional rants.  My ambition is to show readers that what gets quoted in the media (print or electronic) as ‘expert’ opinion is often out of context or plain stupid!  My ex-colleagues told me I was prone to ranting – my response is a rant is a proportional non-violent reaction to utter tosh being promoted as rational expertise.  It happens a lot in finance and economics!

Background

You may have read that the Halifax House Price Index reported a sharp fall in prices this month.  I used to work with the economist who created the original index, but no doubt is has developed since the 1980s.  Some suggest this was a ‘freak’ data item but I doubt that.   The on-line article then quoted the chief economist of an economic research business as saying something to the effect that ‘as long as interest rates don’t rise sharply and people don’t need to sell their houses because they can’t afford their mortgages, prices are not likely to fall’.  My hands were then moving to my head looking for a few remaining hairs to pull out!

Analysis and a bit more realism

Of course, repossessed houses coming on to the market in quantity would probably cause prices to fall very sharply, as they did in past recessions.  That is because of an increase in supply combining with a decrease in demand for owner occupation (partly mitigated by an increase in the demand for houses to rent).  That is just basic beginner’s economics.

However, what our chief economist friend seemed not to want to say (I am sure he thought about this) is that a more general reduction in demand alone, which we are actually seeing in London already, will also cause a fall in prices and a sharp reduction in demand will in time cause a sharp fall in prices.

For example, there are Brexit effects that are not much discussed.  Significant blocks of housing in the East Midlands especially are owned by or occupied on multi-tenant lets by Eastern Europeans.  I know this first hand – I live in Eastern Europe and have friends who have been to the UK to work, some returning home, some not yet, and my parents and sister live in the East Midlands.   That source of demand is already reducing as is evidenced by the shortage of labourers in some industries.

As Britain now appears to outsiders to be a more hostile place for foreigners (it is  – I was recently personally racially abused on a bus in Yorkshire on the apparent assumption that I was an Albanian), people with lots of money (eg Russian, Chinese and  Indian nationals) will not buy in London, which will turn off the main source of liquidity that has been driving prices in the South East too .  If net immigration falls as well, it is certain that demand side of the UK housing market equation will ease off.  That combined effect and possibly rising interest rates as well could mean a long down slope for house prices in those areas that have seen the biggest gains.  Maybe not a bad thing in economic terms, being just the turn of the cycle but falling house prices and recessions often come along together.