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Title: blogmate Blog: jakbop Format: 1 Keywords:tag Comments: ON Main entry text Main entry continuedHouse prices: expect the worst
11 days ago Filed under: UK-Living
By Fred Harrison Nov 07, 2007
In August 2005, Fred Harrison told MoneyWeek that the UK property boom would last for another three years, before ending in 2008. Here he updates his forecast
Recent news on the housing market has been nothing but negative (see the graph below). The International Monetary Fund says UK house prices are 40% overvalued. The Nationwide building society has cut its forecast for 2008 house price growth to 0% – a fall in real terms.
Yet most remain complacent. The Ernst & Young Item Club (using the Treasury’s model) reassures that “it is unlikely there will be a major housing recession”.
However, the truth is that the consensus view on housing has been consistently wrong.
Experts predicted a modest rise in prices for 2006 – in fact, as I forecast in my 2005 MoneyWeek article there was a strong surge, with growth exceeding 10%.
Why do these ‘experts’ get it so wrong? It’s because they are working with defective models, which assume that the health of the property market depends upon the condition of the rest of the economy. In fact, my research suggests that property is the key factor that shapes the business cycle, not the other way around.
My model suggests that the property market runs in 18-year cycles. There have been three in the postwar years (1956-74, 1975-1992 and 1993-2010). The operating mechanism is shown in the graph above. Earnings across the economy rose roughly in line with national income, as did the cost of building homes (including materials, and wages and profits in the construction sector). House prices, however, rose much faster, to disruptive heights, peaking in the booms that result in busts. The cause of this instability is the out-of-control rise in the cost of land. The supply of land is fixed, so when the economy is growing, it has to become more expensive.
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