House prices flat, slide or crash ?
If a press release issued by the Halifax in February is to be believed, ‘house price inflation will be flat’ in 2008. Either this is a case of wishful thinking or the press office simply forgot to check the figures before they wrote it.
In the six years between the third quarters of 2001 and 2007 the average UK house price rose from £121,153 to £230,504; which is an increase of 90%. However during the same period total UK net disposal income from salaries and wages rose from £121.5 billion to £156.7 billion, which is an increase of 29%. Therefore it is clear that the boom in house prices was most definitely not the result of people becoming better off.
When one looks at interest rates during this period you get the same story. The Bank of England base rate in the third quarter of 2001 was 4% and eventually rose throughout the greater part of the boom to a peak of 5.75%, so just as an increase in income was not responsible for it, neither was a reduction in the cost of servicing the mortgage debts that underpinned it.
The housing boom was of course the result of the banks taking the lid off the credit market and a consequent feeding frenzy by householders on the assumption by both parties that the value of any house was destined to go on rising in value without interruption. Now we are beginning to know better.
There are some pretty scary figures that have emerged over the last few months because of this. Total personal debt in the UK is £1.35 billion of which £1.15 billion is mortgage debt. To put this into perspective, the gross domestic product of the UK as at the end of 2007 was £1.33 billion, a ratio of debt to national income of 101%. In any normal business such a ratio would have been spelling insolvency a long time ago.
Nor are interest rates going to be coming to the rescue any time soon. Since the last two rate cuts by the Bank of England a 6% tariff has been added to everything this country imports from fuel and food to goods. The governor of the Bank of England has himself warned of future interest rate cuts being below expectation because of the threat to increased inflation that they pose. In any case the banks are now pulling in their horns by increasing the amount of equity a prospective house buyer can demonstrate before a request for a mortgage is even considered, regardless of what rates are, or likely to be.
Finally there is a survey conducted last year by the Royal Institute of Chartered Surveyors on historical house price trends since 1945. They found that in any house price cycle, when interest rates reach a level of 60% above the low point in that cycle a down turn in the market kicks in. The low point in this cycle was reached in July 2003 when the base rate was cut to 3.5%, whereas today the rate stands at 5.25%. This actually amounts to only a 50% increase but the problem today is that ‘Libor’, which is the premium added to the base rate by the commercial banks before they set their own rates has gone from 0.25% to 0.80%. Given the current state of banking liquidity this is not going to change in the foreseeable future. When this is factored in the actual increase on the low point is 66%.
For anyone in business, planning must take the probability of a substantial fall in house prices into account therefore. This means taking a long hard look at overheads margins and investment in assets, especially where stock levels are concerned. For 2008 cashflow management is going to be the chief priority and that will mean making cuts of your own. The pay-off for you comes as those of your competitors who fail to do so, fall by the wayside.
This article is a guest post from Joe Jonkler owner of http://figurewizard.com/
