Do we need more quantitative easing (QE2) in the UK? It doesn't really look like it, given the strong-ish GDP numbers, our rising rate of inflation and the happy news on manufacturing. But while it is true that our recovery is beginning to look like it has some traction, let's not forget about the one thing that has long been most important to UK consumer confidence (and hence to consumption and growth). House prices.
The Halifax house price index started falling again in February and is down 2.7% since then. The Nationwide index shows something similar with yesterday's numbers showing prices down another 0.3% in November. Prices are still 6-9% up on their lows, but a downward trend is beginning to be very clear (you can read more about what we view as the key housing market indicators here).
That matters because it affects consumer spending. But it also matters, says Graham Turner of GFC, because falling house prices represent risk for the banks. That, in turn, might push up the price at which the market is prepared to lend them money. And they need the market to lend them a lot of money.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The UK's big banks need to roll over loans to the tune of £750-800bn by the end of 2012, says Turner, with the majority of that falling due in 2011. Some of the gap might be covered by rising bank deposits (if they can afford to do so, people tend to save more when house prices are falling and their pensions are under threat). But the rest will eventually have to be found elsewhere.
And if money costs the banks more than it did, mortgages will both become more expensive and even more scarce than they are now. The result? A loop of lower lending (mortgage approvals are already horribly low down 50% since 2007) and lower house prices.
And the way to have a bash at preventing that politically undesirable outcome? A round of QE aimed specifically at pushing funding costs down and lending up.
The Office of Budget Responsibility forecasts house prices to fall 3.5% next year. Capital Economics is going for 10%. Rather like us, Capital Economics is always forecasting house price falls. But, unless we do see another round of QE (something that will be hard to justify if the rest of the economy looks OK) and unless that QE works, this time it looks like they might actually be right.
-
House prices rise 2.9% – will the recovery continue?House prices grew by 2.9% on an annual basis in September. Will Budget policies and ‘higher-for-longer’ rates dent the recovery?
-
Nvidia earnings: what to expectNvidia announces earnings after market close on 20 November. What should investors expect from the semiconductor giant?
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
Value is starting to emerge in the marketsOpinion If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
