Budget cuts depress confidence in housing

6:13 pm - September 23rd 2010

by Newswire    

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Britain’s housing market is in the midst of new dip that will shave at least another 5 percent off current house prices, according to a quarterly Reuters poll of economists and property analysts.

There was a marked shift in tone from previous polls, as 18 out of 24 respondents said they expected to see a “double-dip” in house prices — a scenario dismissed by all but six analysts out of 22 in a poll taken less than three months ago.

With severe government budget cuts soon to take effect and around 600,000 public sector jobs expected to go over the next six years, respondents cited homebuyers’ lack of confidence about the direction of the British economy.

The survey predicted house prices will fall 0.5 percent next year on average after rising 1.0 percent in 2010 — essentially flat-lining. In July, analysts predicted home prices would climb 3.5 percent this year and nearly 2 percent next year.

…more at Reuters

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Reader comments

the Daily Mail / Express is that way =>

[oh, god, if I must: 😉 ]

Wasn’t it considered unBritish to talk down the economy not too long ago? How things change.

Surely low house prices are a good thing? (As are low prices for everything else)

File under “rubbish”.

“18 out of 24 respondents said waffle”. From that quote (which also appears in the Reuters story), I am unclear whether the survey sample size was 24, or 75% of respondents said waffle. [They really meant 24 “experts”; oh dear]

On the substantive point, new houses are relatively cheap to build and land is expensive. The price of old and new houses is determined by land price. To increase home ownership or rental opportunities, you have two choices: increase incomes or make more land available for homes.

This paper presented to the Royal Economic Society conference at Nottingham Uni in 2006 denied that there was a house price bubble:


But that wasn’t what other economists had been saying – try this from 2002:

“CHARLES GOODHART, a former member of the Bank of England’s monetary policy committee [and economics prof at the LSE], warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

“His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . ”

There’s an interesting divergence between the trend in house prices 1997-2006 and what happened to the stockmarket prices of equity:

“American house prices rose 124% between 1997 and 2006, while the Standard & Poor’s 500 index fell by 8%; half of US growth in 2005 was house-related. In the UK, house prices increased by 97% in the same period, while the FTSE 100 fell by 10%.” Robert Skidelsky: Keynes – The Return of the Master (Allen Lane 2009) p.5.

Divide the average UK house price by the average earnings and you get the ‘Average House Price/Earnings ratio’. This is what you get for the period 1953 to 2006:

Of course, house-price bubbles tend to be very popular among house-owners.

Tricky stuff this, house prices. If the UK builds more houses, prices will fall which is great for people who consider that a house is somewhere that you live. It is bad for people who consider home ownership as an investment.

It is also bad for government. For the middle classes, home ownership is part of the pension package. When savings run out and the care home bills arrive, the old home is a source of income. Local authorities provide debentures for this scenario.

But if house prices fall by 20%, for example, the old home debenture falls by 20%. Old people will run out of money for their care more quickly. Which is when government picks up the tab.

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  1. Liberal Conspiracy

    Budget cuts depress confidence in housing market http://bit.ly/b1wuNE

  2. Tchiyiwe T Chihana

    RT @libcon: Budget cuts depress confidence in housing market http://bit.ly/b1wuNE

  3. John Carmine

    Budget cuts depress confidence in housing | Liberal Conspiracy: Britain's housing market is in the midst of new di… http://bit.ly/bEODkT

  4. Countering the Coalition cuts: a myth-busting guide | Liberal Conspiracy

    […] Budget cuts depress confidence in housing […]

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