Why UK house price falls are inevitable

Update: read Where next for UK house prices? for more analysis on the UK housing market

Because of our bearish long-term view for UK property, which we believe to be significantly over-priced at current levels, we have spent the past year wondering about the impact that the new pension rules would have on the property market because of the expected wall of money.

We wondered quietly to ourselves what would cause this wall of money not to arrive, never thinking that Gordon Brown would literally turn off the tap just a few months before D-Day, or should we say, A-Day.Such a reversal so late in the day is, in our view, quite shocking.Its impact on the property market is likely to be bad.Sentiment might deteriorate alarmingly to such an extent for it to be the tipping point.

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Just prior to Gordon Brown's statement, the Portman Building Society sent an e-mail on Monday 5th December to intermediaries, it read "With effect from Monday 5th December 2005 The Mortgage Works (part of the Portman Building Society Group) will cease to accept new applications for buy-to-let mortgages on newly built properties."The Portman was reported as saying that they would avoid lending on new properties until "the market forces of supply and demand return to equilibrium". The Portman is the third largest provider of buy-to-let mortgages, so their action is important.

Jim Pickard, who writes the property column for the FT, recently posed the interesting question.Why is there continued optimism, particularly in newspaper headlines, about the UK property market when the current year apparently is set to enter the history books for the lowest number of property sales for 30 years?

The UK's deeply inverted yield curve continues, with 50-year yields still below 4% at a time when short-term rates are 4.5%.Economic weakness arising from a slowdown in consumer spending, based on a faltering property market, encourages us to expect a UK recession next year, if not a global recession.That would not be good news for asset prices such as equities, which remain pressured by the continuing actions of major pension funds looking for more reliable investment opportunities than equities, to cover more appropriately their long-term liabilities.

The key to the puzzle might be the developing credit crunch, which if it continues, will provide the nail in the coffin for the economy.

The credit crunch

In the past two weeks we have read the following:

i) County Court Judgements soar by 40%, the Telegraph reported that the number this year was around 864,000 compared to 610,000 last year.

ii) Barclays Bank's credit card business is likely to see profits drop this year for the first time since 1997 on the back of an increase in bad debts.

iii) The Halifax Bank of Scotland (HBOS) have recently adopted a more cautious approach, being more selective in their lending policies. Loan growth has been reduced to single digits from 15-20%.

iv) Barclaycard, Co-operative Bank, Egg and Abbey have agreed to extend the data they provide about customers to the main credit reference agencies such as Experian (this will, for some borrowers, make arranging more credit much more difficult).

v) The one we have already mentioned, Portman Building Society's exit from buy-to-let mortgages on newly built properties.

vi) The loss of a huge number of private pension pots that were set to buy into UK housing from 6th April 2006, technically, not a credit issue, but nonetheless one with a similar effect.

House price inflation is always associated with growing credit facilities and easing lending criteria. House price deflation can be plotted against reducing credit facilities and tightening of lending criteria. One follows the other as sure as night follows day.

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.

For more from RHAM, visit https://www.rhasset.co.uk/