Longer dole queues are bad news for house prices
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Associate Editor
David Stevenson Apr 23, 2009
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There's only one way for house prices to go
As if the Budget wasn't bad enough, there was plenty more bad news for the economy yesterday. As well as Britain's public deficit swelling to its largest since World War II (see Why the budget will cost us all a fortune for more), the dole queues are rapidly getting longer. That's a nightmare for people losing their jobs – and it's also potentially disastrous for house prices.
A few green shoots may be appearing on the residential property scene right now. But they look pretty weedy. Mortgage approvals are still 65% below pre-crunch levels and well below levels seen in the early 1990s downturn, while transaction volumes are still low.
Although a couple of lenders have cut the size of the deposits they want, that's no great help to first-time buyers who still have to put down 25-30% of the purchase price to get the best deals.
But now the housing market is going to have to contend with its long-term nemesis – rising unemployment.
When the dole queues lengthen, home values fall. It's entirely logical, because fewer people in work means a lower overall level of 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.
As prices drop, more 'loose holders' - like buy-to-let landlords who are desperate to service their bank borrowings – are driven into unloading their investments at fire-sale prices. It all adds up to a vicious downward value spiral.
Just look at the chart below which goes back to 1991. The yellow line shows the average UK house price according to the Halifax indices, while the red line, the latest number of Britons out of work.
Note how, despite all the talk that they'd been overvalued for ages, home values only nosedived when job losses really began kicking in over the last twelve months. Even if Britain's dole queues only extend as far as the Organisation for Economic Co-operation and Development's three million forecast, imagine what's in store for the housing market.
And if some of the gloomier predictions turn out to be right - taking job losses literally right off the chart - history shows us that complete carnage could be on the cards.
The Halifax house price-to-earnings ratio is still some 10% above its long-run average, so despite the falls to-date, valuations are nowhere near 'cheap' yet. What's more, as the US is seeing, when property really goes pear-shaped, prices can plunge way below so-called 'fair' value.
Although the market peaked out in America much earlier than in Britain, prices are still falling. Commerzbank's analysts said yesterday that US home prices could plummet a further 30% even from this point.
If we're lucky, it might not get quite that bad over here. We've less spare space to build on, so the cost of land may not collapse as much as in the US. But IHS Global Insight reckons there could be a further 15% house price drop from now, while Jeremy Grantham at GMO sees a further 25% fall.
As the Observer's Ruth Sutherland points out: "house prices need to re-couple with wages, employment and the economy as a whole. That journey back to reality isn't over yet".
Soaring job losses could be about to make that trip a whole lot longer.
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