It looks as though house prices in Britain might be heading downhill again.
Recent figures from both Nationwide and Halifax suggest that prices are under pressure. Nationwide reckons that prices fell by 2.6% year-on-year in July, the worst fall in three years. Halifax also saw prices drop in July, registering an annual fall of 0.6%.
Is this just the usual volatility we've grown used to since the financial crisis kicked off?
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Or is there more to it this time?
House prices have already slid in many parts of the country
It's perhaps no surprise that house prices seem to have been weakening of late. We're firmly in recession after all. And other indicators suggest that demand has been dropping off.
The number of mortgage approvals fell to an 18-month low in June. Also, the number of new buyers in the market slipped for the second month in a row, according to the Royal Institution of Chartered Surveyors.
That sounds like a recipe for lower house prices. But as Capital Economics points out, weak demand is being met with a drop in the number of homes being put on the market. This "argues against a rapid price correction".
See alsoWhat is UK property really worth? Here are three ways to find outAre UK house prices too high? And how do you value residential property anyway? Phil Oakley looks at some of the most popular valuation methods to find out what property in Britain is really worth.
Also, the government has introduced its 'Funding for Lending' scheme. This is where it makes cheap loans available to the banks as long as they use the money to lend to consumers and businesses.
Overall, Capital reckons that prices will fall by around 5% this year.
That would be helpful. Prices in Britain remain far too expensive. It's silly to view the high cost of shelter as being any more of a positive thing, than a high petrol price, or more costly heating bills.
However, there is another factor to consider that could potentially see prices fall more rapidly.
It's important to realise that outside of London and the south of England, house prices have fallen pretty hard already in many areas. Northern Ireland has been by far the worst hit. In the second quarter of this year, prices were down 10.6% on last year, according to Nationwide.
That's an unusually brutal fall. But in Wales for example, prices were down 5.3%. Scotland and the north of England have seen prices fall by around 2-4% (depending on where you look).
In other words, it's largely the south of England and London that have seen gains or at least been flat.
The flood of scared money rushing into London
So what's driving that? One key factor has been the flood of money from Europe seeking a safe place to invest. This money is running scared. All this money cares about is getting out of its host country broadly intact. It is almost entirely price-insensitive.
So this is not value-seeking money. This money is happy to overpay for an asset, as long as it offers a relatively high level of capital protection. This is the sort of money that is driving up the price of gilts to the point where they yield less than nothing after you take account of inflation.
This money does not give a damn about the state of the UK economy. It's just happy to know that British society will still be there in roughly the same overall shape in ten years' time.
This sounds mad during normal times, but it makes perfect sense now. If I lived in Greece, I would be willing to take a pretty hefty 'haircut' to transfer my wealth into sterling assets.
Why? Because if my Greek euros turn into drachma, then for all I know, I could be looking at a loss of 50% or more. And if the government stops me from taking my money out of the country, it'll be vulnerable to punitive taxation.
This isn't theoretical. Theodoros Pantalakis, former chief executive of the Agricultural Bank in Greece, bought a London property in 2011. He used €8m to do it. There's nothing illegal about what he did, but you do have to question the ethics of yanking your savings out of the country, while your fellow Greeks are sticking their savings into your bank.
The point about this flood of money is that it's a temporary factor. Yes London is a wonderful city for the super-rich, I'm sure. And the Olympics is presenting it in a very favourable light. But if Europe wasn't in quite such a mess, there simply wouldn't be the same level of 'safe haven' flows into the region.
So chances are, once the European Central Bank (ECB) starts printing money, then at least some of the safe haven flow will reverse. At the very least, the amount of money fleeing the eurozone will slow down.
That could be great news for lots of assets, particularly cheap stocks in Europe. But it'll also be bad news for the assets that have benefited from all that 'scared' money. Suddenly a prime property in London will look expensive, rather than a low-risk way to shift a lot of cash quickly.
So ironically, the biggest threat to the UK housing market could be any sign of a recovery in Europe. The good news is, at least you can profit from this. We've already looked at various ways to cash in on any money-printing in Europe, and we'll be looking at more in the next issue of MoneyWeek, out on Friday. (If you're not already a subscriber, subscribe to MoneyWeek magazine.)
Don't bank on Funding for Lending
As for the 'Funding for Lending' scheme, as far as I can see, banks are likely to use that to launch more mortgages aimed at people with lots of equity in their homes. So if you already own half of your home, you'll be swamped with offers to remortgage at ever-lower rates.
That's because the bank knows you probably won't default. And if you do, they'll definitely make a profit when they repossess your house, because they've only loaned you half its value.
But if you're a first-time buyer (or a small business), forget about it. And if you're a saver you should also be irritated. If banks can get cheap funding elsewhere, they'll stop competing for your business. So you can expect interest rates on savings accounts to be lower than they would otherwise be. Yet another reason to be fed up with bank bail-out schemes.
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