UK House Prices Crash 2009- Update

By: Nadeem_Walayat

A cheer went up amongst housing market participants across the land as UK house prices rose by nearly 1% in January 2009 as measured by the Halifax. However the government is throwing everything including the kitchen sink at the housing market to bring about a halt to the ongoing crash in nominal terms. The amount of money printed has mushroomed from the £50 billion of April 2008. that I warned was just the tip of the ice-berg that would soon mushroom into the hundreds of billions, we are now in the process of leaving the hundreds of billions behind and moving into the trillions, sums that seriously risk the bankruptcy of Britain.

The mainstream media has jumped on the one month bounce to start contemplating the return of the housing bull market i.e. The Times reports - The 10 towns where house prices will bounce back first - " Property website's recorded a surge of activity in the first few weeks of this year, estate agents had a busier January than previous months and Halifax even reported a small rise in house prices."

UK Housing Market Affordability and Interest Rates

The February rate cut to 1% fulfills the forecast target for 2009 (4th Dec 08 - UK Interest Rates Forecast to Crash to 1% ). with the next stop a similar Zero Interest Rate Policy (ZIRP) as that adopted by the United States that have cut their interest rate to 0.25%. The deep cuts in interest rates whilst not wholly passed on have resulted in a fall in the economic rate of interest from over 6% in September 2008 to 3.54% today. This is having a positive impact on the affordability despite the recession and hence supportive of house prices in the short-term.

UK House Price Forecast 2007 - 2012

The rise in UK house prices during January 09 brings a pause to the house price crash that is now into its 18th month as the above graph illustrates as per the updated house price forecast that covers the trend into 2012 which projects for a total drop from peak to trough of 38%. However, as I have warned many times over the past 18 months, the government has in its power the ability to print money to bring nominal house price falls to standstill, this money printing is now quaintly termed as "Quantative Easing" so as to hide the truth and mask the continuing crash in house prices that despite the opinion of the mainstream press by the likes of Anatole Kaletsky and Ambrose Evans-Pritchard HAS put Britain on the path towards bankruptcy, as explained in the depth analysis of November 2008 - Bankrupt Britain Trending Towards Hyper-Inflation?

The Labour governments primary objective remains to maximise its chances of winning the next election, this will be to the detriment of future growth as the consequences of printing money and the exploding debt burden risks a currency crash that at best means many years of stagflation and at worst hyperinflationary bankruptcy along the lines of the Weimar Republic and the most recent example of Iceland. This is evidenced by the following graph of UK house prices in terms of inflation, and our key trading partner the United States (U.S. Dollar), with a similar fall observed against the Euro.

The above graphs clearly illustrate that the UK housing market has crashed by 25% (real terms) and over 40% (U.S. Dollar / Euro) which is having a severe impact on the UK economy as the real deflation of a 40% loss of value of house prices added to the more than 50% of that of stocks is tipping the UK economy towards economic depression. Therefore home buyers need to guard against the ILLUSION of stabilising house prices whilst the real terms crash in house prices continues.

UK House Prices Regional Trends

While average house prices as of December 2008 are down 20%, in terms of price crash experience Northern Ireland tops the list at 35%, meanwhile Scotland continues to buck the trend by only registering a 6% drop to date.

Deflation of 2009 Will Eventually Turn to Inflation

My earlier analysis of the UK inflation concluded that the UK is heading for real deflation during 2009, with the RPI inflation measure expected to go negative by mid 2009 by targeting -1.2% . The expectations are for similar deflation across the world, as deficit spending stimulus packages cannot hope to compete against the loss of asset values which are in the order of ten times the amount of planned stimulus. The analysis also concluded that the immediate risks to the forecast are to the downside i.e. prices spiking lower than expected.

This therefore implies for short-term support of the housing market and for further stimulus packages far beyond that which have been committed to date, with all of the associated consequences of a collapse in sterling under the weight of growing deficits and liabilities which sets the scene for higher future inflation as the deflationary impact of collapse in crude oil during the second half of 2008 starts to leave the inflation indices during the second half of 2009, thereafter the deflationary forces of contracting economies will compete with the inflationary forces of money printing and rising commodity prices which will further put house prices under increased real terms pressure.

For more on the impact of deflation, download the world's foremost expert on and proponent of the deflationary scenario, Robert Prechter's FREE 60-page Deflation Survival eBook or browse various deflation topics like those below :

• What happens during deflation?
• Why is deflation bad?
• Effects of deflation
• Deflationary spiral
• And much more in Prechter's FREE Deflation Survival Guide.

The question that now needs to be answered is how far will UK's GDP contract during the current recession, as that will determine how bad the housing bear market will be in real terms. The indepth forecast for the UK recession is underway, to receive this in your email in box on the date of publication subscribe to my always free email newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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