Don’t believe Gordon Brown – the housing market is in big trouble

House prices saw their biggest monthly fall since September 1992 in March, Halifax reported yesterday.

A whole 2.5% in a single month that's £4,909 off the value of the average house, using the building society's figures.

But don't worry. Prime Minister Gordon Brown reckons everything will be fine. After all, "we've seen house prices rise by 180% over the last 10 years and they have risen by about 18% over the last three years, so a 2.5% fall is something that is containable."

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That statement is such nonsense, it's hard to know where to begin criticising it.

But let's have a try anyway

The 2.5% fall is just the beginning

Mr Brown's reassuring statement is simply disingenuous. Sure, house prices have jumped by 180% in the past ten years. But this 2.5% fall happened over the course of just one month. If you annualised that (multiply by 12), then that would be a 30% fall in house prices over the course of a year.

Of course, you can't do that the monthly figures are volatile, and I fully expect the Halifax index to see some sort of bounce (or at the very least, a much smaller drop) for this month, simply because the March fall has been so big.

The point is that yes, a 2.5% fall would be containable if that was the end of it. But it won't be. This is just the beginning of the crash. Certainly, we can't expect the government to acknowledge that immediately. After all, it took at least a year and probably longer for the US authorities to begin to admit that there was no end in sight to the house price crash over there. But as that experience also shows, politicians can't prevent bad news from happening simply by going into denial mode.

The bigger lie, however, is a much more fundamental one. Mr Brown's statement suggests that the 180% rise in house prices over the past decade is a good thing. It's not. It's a bad thing. And it's a bad thing regardless of what you believe has driven prices higher.

If you think that house prices have risen because of a supply and demand imbalance, then it shows that the property market is failing in some way. A rising price in this context warns producers (in this case, builders) that we need more of something (in this case, houses). The fact that prices have risen so far and for so long suggests therefore that our mechanism for satisfying housing demand is sorely lacking. That's a failure of government ultimately, because it comes down to bad planning and confused building regulations.

If, as we do, you think the rise in house prices has much more to do with the availability of cheap credit, then that's also a bad thing. Because it's discouraged saving, and encouraged breath-taking levels of risk-taking behaviour amongst financially nave consumers. I suspect that the carnage set to ensue due to the number of 100%-plus, interest-only and six-times-salary mortgages taken out in recent years will dwarf any mis-selling scandal we've seen in the past few decades. Certainly, I find it hard to believe that the property industry will escape this crash without having stricter regulation imposed on it.

House prices are now falling year-on-year

By the way, not many people pointed this out, but if you look at the raw data, house prices are now falling year-on-year. Halifax takes the three-monthly average and comes up with annual growth of 1.1%. But taking the March average house price of £191,556 alone, reveals a 1.3% fall on March 2007, when the average price was £194,094, and a whopping 4% fall on August last year.

So when the Halifax argues that we'll see "low-single digit" price falls this year well, we're already there. Are things going to stabilise in the next few months? I doubt it. Expect to see that forecast downgraded to "high-single digit" before the end of the year.

Turning to the wider markets

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In London, the FTSE 100 fell 24 points to end at 5,990. Housebuilder Persimmon slipped after the grim house price data from Halifax, while British Airways continued to fall amid rising fuel prices and the ongoing Terminal 5 problems. BHP Billiton was the top riser amid reports that China's Bao Steel is looking to take a stake in the group.

Across the Channel, the Paris CAC-40 lost 31 points to end the day at 4,912. And in Frankfurt, the DAX-30 slipped 49 points to 6,771.

On Wall Street, US stocks slipped back amid news that pending house sales fell 1.9% in February. The Dow Jones fell 35 points to end at 12,576. The broader S&P 500 slipped 7 points, to 1,365, while the tech-heavy Nasdaq shed 16 points to close at 2,348.

In Asia, Japanese stocks fell for the second day in a row, with the Nikkei falling 138 points to close at 13,111.

Crude oil was trading at around $108.65 this morning, while Brent spot was broadly flat, at $106.25.

Spot gold was trading at around $905 an ounce this morning, as the IMF announced it is to sell more than 14.2m ounces of its reserves. Platinum was also lower at around $1,993, while silver was trading at $17.47.

Turning to forex, sterling was trading at 1.9672 against the dollar, and at 1.2511 against the euro. The dollar was last trading at 0.6361 against the euro and 102.22 against the Japanese yen.

And this morning, Nationwide Building Society reports that consumer confidence in the UK has hit its lowest level in nearly four years. A growing number of analysts now expect the Bank of England to announce a cut in interest rates tomorrow.

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