UK property to HALVE between now and July 29 2010

Published ¤ 30/07/2009

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"It seems the worst is behind us," says Nicholas Leeming of "Confidence in the housing market is at its highest since the credit crunch began."

Don't buy into the property rally, reader.

It's for SUCKERS.

You have a right to be skeptical.
Nationwide reported that May house prices rose by 1.2%. Halifax claimed a rise of 2.6% for the same month.

The Bank of England confirmed that new mortgage approvals (often a good forward indicator) climbed 8% during April to 43,201, their highest level for almost a year.

So do the property optimists seem to have a point?

In a word: NO!
Dig below the surface, and the outlook is far worse than most in the mainstream press are willing to let on.

There are five rock-solid reasons why we think residential property will halve between now and July 29, 2010:
Banks are terrified of lending.

Home loan conditions are still very tight - two-thirds of all current mortgage offers require a 25% deposit. And they aren't showing any sign of easing up. Gross mortgage lending was down 52% year-on-year in April, while net lending reached its lowest for eight years, says the British Bankers' Association.

Mortgage approvals are still 22% down on April 2008 and 60% below their "pre-correction" levels. That's a long way off the 80,000 level that has historically been consistent with stable house prices, let alone values rising again.
The rising cost of borrowing will EXTINGUISH any signs of recovery.

If you're taking solace in low interest rates, you better think again. Homebuyers are about to face their first mortgage rate rise this year. Nationwide has upped the cost of its fixed-rate deals by up to 0.86%, and state-owned Northern Rock has raised its five-year fixed rates by 0.2%. Ray Boulger at mortgage broker John Charcol says most, and possibly all, of the part-nationalised Lloyds Banking Group - which includes Halifax, Bank of Scotland, Lloyds TSB and Cheltenham & Gloucester - will increase their fixed rates, "in some cases by quite large amounts".

"Any material rise in government funding costs will have a knock-on effect on secured borrowing, putting significant pressure on households," says RBC Capital Markets' John Wraith. "This could have a serious impact on any UK economic recovery."
UK property is still MASSIVELY unaffordable.

Do you really think that house prices have dropped to a reasonable and fair level? From 1983 to 2001, the ratio of mortgage advances to earnings remained within a range of two to 2.5 times. By 2007, it had risen to above four times. Although affordability has improved a bit in the last year, it remains stretched.

According to John Bell of Shore Capital: "If real [inflation adjusted] wages fall, affordability may not be restored for the best part of a decade." And real incomes are falling. UK average weekly earnings fell 3% year-on-year in March. During past downturns in Britain, Japan and the Nordic countries gains made during the bubble periods were entirely lost in real terms.

If history repeats itself, Bell predicts "house prices could more than halve from here".
UK's own "sub prime" crisis is about to explode. Almost a third of British non-conforming mortgages - where borrowers with weak credit scores were given loans on the back of minimal, or no, documentation - taken out in 2005 are now 90 or more days behind on their payments.

These are our "sub prime" mortgages.

According to David Watts at CreditSights these are "alarming numbers, uglier than expected". It could all add up to another surge in repossessions, and more houses hitting the market when it's least able to absorb them.
10% unemployment will make rising house prices a virtual impossibility.

"Unemployment is predicted to soar from its current 7% to over 10%", says George Hay on Breakingviews.

That's perhaps the worst news of all for property prices.

When dole queues lengthen, home values fall.

Fewer people in work means lower disposable income available to make mortgage repayments. That both cuts the number of new buyers and increases the supply of forced sellers who can't meet their existing home loan bills. Sadly, it also raises the level of repossessions.

Just take a look at the chart below to see how unemployment and house prices tend to be inversely correlated. As you can see, as unemployment rises, house prices fall...
MoneyWeek chart

According to John Philpott, Chief Economist at the Chartered Institute of Personal Development UK unemployment will peak at 3.2 million in July 29, 2010 - the end of the second financial quarter.

This is around the time we should see a bottom in house prices.

To repeat: this brief rally in house prices cannot last.

If you want to profit in the next 24 months, get out of the property market.

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