Don't be fooled - house prices will fall again

One year on from Britain's property slump, and house prices seem to have staged a dramatic rebound. Some areas have even hit new all-time highs. So what's going on, and what happens next? James Ferguson explains.

It's been five years since I first warned MoneyWeek readers that Anglo-Saxon property prices in general, and British ones in particular, were getting too high. Almost four years ago, the US Case-Shiller 20-city home price index peaked. Then 18 months later, in late 2007, British house prices reached their zenith.

The housing bubble didn't burst in isolation. Subprime mortgage-backed securities all but took out the US banking system. In Britain, aggressive lending and lax standards knocked down banks like nine-pins. Failing banks led to imploding credit, which resulted in further house-price falls, as mortgages became impossible to come by. American bank lending has been falling steadily now since November 2008. By the end of 2009 it was down a staggering 7.2% year-on-year. The sharpest post-War contraction in bank lending before this was the 1% annual drop seen in September 1975. So this is truly historic stuff. It's perhaps not surprising that American house prices are already 30% off their 2006 peak.

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James Ferguson qualified with an MA (Hons) in economics from Edinburgh University in 1985. For the last 21 years he has had a high-powered career in institutional stock broking, specialising in equities, working for Nomura, Robert Fleming, SBC Warburg, Dresdner Kleinwort Wasserstein and Mitsubishi Securities.