Beware the sucker’s rally in UK property

When it comes to the UK house price crash, Brian Durrant of the Fleet Street Letter has always been a sceptic. He and the team have so far been right in predicting a slowdown, rather than an all-out slump in the market. So that's all the more reason to listen when he says he believes the current apparent pick-up in prices is a dangerous 'sucker's rally'...

UK house prices have perked up in the last three months. Nationwide building society reported a 1.3% increase in October, while the Halifax registered increases in August and September of 1.9% and 1.1% respectively.

Estate agents are said to have a spring in their approvals are up 24% on a year ago...and even though it's turned cold, the sun is shining on house prices once more!

But you are not alone if you've been wondering about the REAL state of the housing market lately. And if, like most of us, the largest proportion of your wealth is held in the form of residential property, you're right to be concerned.

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First, let's look at how UK house prices got where they are today. As long-time Fleet Street Letter readers know, our track record of forecasting the property market's major trends has been consistently more reliable than some of the attention-seeking pundits in the mainstream media.

For example...

** After the 9/11 attacks on America, the newspapers latched onto a survey of just 4,000 people in Britain which said prospective home-buyers had lost confidence in the housing market. But we argued the opposite; interest rate cuts to shore up the world economy would give a fresh impetus to the UK housing market. We were right...

** In January 2003, Professor Andrew Oswald of Warwick University urged us to sell up - quick! - because "over the next two years there is going to be blood on the estate agents' carpets from Thurso to Torquay". He forecast a 30% crash in house prices. But in the same month we explained "why you shouldn't sell your home on talk of a house price crash".

If you had taken Prof Oswald's advice you would have missed out on a gain in the average property price from £107,905 to £157,107...a massive 33%.

** By the spring of 2003 the jeremiahs were at it again. The press said uncertainty generated by the war in Iraq would keep house buyers away. But we ran analysis showing "why so-called war jitters are good news for the housing market".

And guess what; the housing market kept going up!

** Then in February 2004 Durlacher issued a report and talked of a 45% decline in house prices - even if unemployment and interest rates remained the same. Another attention grabbing headline. The Fleet Street Letter countered by saying that 2004 would be the last year of big house price increases, but there would be no crash.

Twenty-one months on, our forecast looks to have been pretty much spot on...

In fact, it was only in June 2004 that we became more cautious about the UK housing market. We were surprised by the 10% increase in house prices in the first five months of the year, and argued - as the Bank of England did - that if house prices continued on this path then the chances of a soft landing would be greatly reduced.

Fortunately house price inflation thereafter became more subdued, and by October last year we believed the house price boom could not go on any further. But we also subscribed to the view that house price inflation would level off.

Again, that's what happened. In the twelve months to September 2005, house prices in the UK rose by only 1.8%.

Still the pundits continued with their blood-curdling threats of a housing crash. In June this year, the prophets of doom - including some of our own team here at the Fleet Street Letter - latched on to the latest Royal Institute of Chartered Surveyors survey.

It showed the most pessimistic reading since 1992.

But I argued for common-sense and caution. In the end, after much heated debate, my view prevailed. 'This is NOT the time to panic over house prices," we told subscribers.

And now? From a crowded field, the silliest headline in recent weeks has come from the Express. On September 30 its banner headline screamed: "House prices slump". This followed news that the Nationwide building society had reported a 0.2% drop in house prices in the month.

If this is a slump, I ask, what is a dip?

Of course, if a pundit talks of a housing crash he or she is more likely to get noticed. The prophecy of a slump is so much sexier than forecasting a period of stagnation. But thanks to all this 'crying wolf', there must come a point when the great British public cease to believe anyone's warnings about a house price crash.

I want you to understand today just how dangerous this new situation could be for your wealth and investments. I hope I have demonstrated that the Fleet Street Letter has NEVER cried wolf about the UK housing market.

But believe it or not, now is not the time to get complacent. Here's why.

The recent rise in house prices and the increase in mortgage approvals might represent a change in mood. Perhaps people believe that following the August base rate cut, interest rates have peaked. Or maybe they are indeed no longer deterred by the hopelessly wrong prophets of doom.

Whatever the reason, however, if house price inflation picks up again to double figures by next spring, then the chances of an eventual fall in house prices becomes greater. In short, Britain needs a period of further house price stagnation to work off today's stretched valuations in the housing market.

A rise in prices from here would take us in the wrong direction. It would represent a classic sucker's rally.

So now is NOT the time to increase your exposure to UK residential property. The prophets of doom may have finally got it right...just as they change their tack, and decide that in fact things will work out just fine.

Beware residential property.

By Brian Durrant for The Fleet Street Letter

Brian has contributed to MoneyWeek with his expertise in investment strategy, for example how to quadruple your dividend income and how to navigate through the stock market in the 2008 financial crisis. He’s also touched on personal finance such as the housing market and the UK economy.