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House Price Outlook (1 January 2009 – 15 March 2009)

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Key Trends:
> House prices to continue downward trajectory
> How the Government is destroying our wealth

It has been a couple of months since I last wrote. While I know that a number of you were hoping for more regular updates over the last couple of months, take comfort from the fact that the trends I described in the 2009 Outlook are set for the year ahead.

This is one of the advantages of focussing on the big picture – once a trend is established you can ignore all of the day to day noise and let the situation slowly drift in your favour.

We are in the early stages of a significant house price correction. We know that house prices are falling and will continue to do so for some time yet, so let them fall. In the meantime, make sure you get your finances in order, save as much as you can and position yourself for the eventual bottom of the market.

If you are cash rich you will need to protect yourself from the second major trend, the Government’s money printing, which will slowly transfer your wealth to indebted homeowners in order to help bail them out.

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Section Index

House Prices & Housing Market Review >
It is Too Soon to Buy >
The Government - Happily Printing Money & Transferring Wealth >
What Can You Do to Protect Yourself? >

House Prices & Housing Market Review

The start of the year was characterised by a surge in the number of properties coming onto the market. Large numbers of homes were hurriedly launched or re-launched by vendors hoping to capitalise on this usually busy period. New listings were generally introduced with conservative price tags while many of the re-launched properties had undergone price cuts of 10% or so over the Christmas period.

It is still very much a buyer’s market. The most skilled negotiators are lopping 20-30% off the price of their purchases, and gazundering remains a problem for sellers. The level of viewings has been unseasonably low as buyers wait to see how the economic situation unfolds and what impact it will have on house prices.

Even the weather has worked against sellers, as February’s plunging temperatures and snow covered roads kept viewings to a minimum.

Current Market Conditions

As we moved into March there was an uptick in the number of prospective buyers listing interest with estate agents as the lure of price cuts and a low interest rate environment enticed some bargain hunters (although these are still nowhere near bargain prices).

But the few bright spots were overrun by the downward momentum of falling house prices and a tumbling market.

As we have seen in previous months, vendors who are not happy to accept price cuts are still resorting to letting out their properties instead. Given the shortage of affluent renters in the current economic climate such vendors are hit not only by falling house prices but by falling rents too – it is a dangerous strategy.

Housing Market Drivers

In the 2009 Outlook I noted that job losses would be the key driver for the market in the current year. I can’t remember where I saw it, but the following quote sums up the notion well: “in a recession your neighbour loses his job; in a depression you lose your job”.

As more people become directly or indirectly impacted by redundancy their outlooks will become increasingly defensive, conservative and pessimistic, leading to a vicious circle of lower consumer spending, lower corporate profitability and yet more job losses.

Given the astronomic level which house prices reached at the peak, it is my view that many families will become at risk of losing their homes even if only one of the household wage streams is lost.

As a result I do not expect the current modest increase in buyer interest to continue and as conditions worsen I expect the number of sales to collapse further. Many sales which have already been agreed will likely collapse before completion as buyers’ nerves get the better of them, adding further downward pressure to house prices.

My Plans

It is still nowhere near buying time. House prices will continue to fall significantly from the current levels and it makes much more sense to rent and wait than to jump in too early and get your fingers burned.

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It's Too Soon to Buy

Human beings are predictable creatures. As corrections such as this progress our opinions tend to follow predictable patterns. In the early stages of a crash the consensus is that the correction is only temporary. Most people only remember house prices rising over the last decade, so have a natural tendency to expect that trend to continue.

The media is no different, publishing headlines which focus on tiny rebounds in buyer interest or house prices. They continually question whether the bottom of the housing market has now been reached.

There is also a focus on factors which make the situation appear more favourable than it is, and such press releases usually come from vested interests who have the most to lose from the ongoing property slump.

One such example is a renewed focus on affordability. During the final stages of the house price bubble, as house prices rose to silly levels, first time buyers were shut out of the market. In order to keep the market buoyant, many vested interests diverted attention to affordability, suggesting that buyers who took out 100% mortgages did not need big cash deposits, and with interest rates so low, the repayments on interest only mortgages were much lower than had been the case historically. Of course, these statements do nothing more than to funnel people into unsuitable, over-priced properties at exactly the wrong time.

We are now seeing a return of the affordability argument. I have read numerous articles and releases which state that affordability is now the best it has been for several years. That might be the case – house prices are back to their 2004/05 levels and interest rates have fallen to historic lows. But such statements need to be taken within the context of the current situation.

We are still in the early stages of this depression (probably about a third of the way through) and there will be no good news for some time to come. The economy will continue to contract, jobs will continue to be lost and house prices will continue to plummet. Interest rates may currently be at historic lows, but they will eventually go back up and when they do they will increase mortgage payments and make homes unaffordable again.

The Winter Rule

During the winter, I reinstate one of my favourite rules: cold weather = more time in cosy pubs. Pubs are a great place to learn what the locals make of the house price crash, how they are coping in their current situations and what they believe the future holds.

The consensus views I refer to above are confirmed frequently by the people I meet. Here are what the locals in my area are telling me...

Assumption 1 – a quick recovery is imminent

This is what I seem to hear continually and it means that most people are still in denial or do understand the scale of the problems at hand. There is a clear expectation that house prices will recover quickly. The rally of the last decade is emblazoned in the mind of the public and a quick return to the good old days is anticipated.

I have come across a couple of examples in which homeowners have elected to rent out their properties, either because they are priced to high and therefore have not sold, or because the valuation suggested by the estate agent was below their expectations.

In these examples the homeowners’ intention is to rent out their properties for 2-3 years before selling. They assume that house prices will have recovered to their peak level in 2-3 years. In my view, we will be looking at house prices 50% below their peak. Two very different opinions – only one correct answer.

Assumption 2 – now is a good time to buy or to scale up

I remember overhearing a young lady who owned 50% of her home, the remainder being owned by her flatmate. Since her flatmate was moving out, the lady was in the process of purchasing the remaining 50% on the basis that falling interest rates had reduced her mortgage payments and she could now afford to take on the payments for the whole mortgage.

There seemed to be two key flaws in her plan. Firstly, as we saw in Assumption 1, she is still assuming that now is a good time to buy and that a quick recovery will be forthcoming.

Secondly, she was hinging her plan on the fact that interest rates will remain at these unprecedented lows. My hope is that she will elect to go for a fixed rate mortgage, but since fixed rate mortgages tend to be more expensive that variable mortgages, many people choose take the cheaper variable option. When inflation does start to engulf the nation, there is a possibility of rates rising up to high double digits, just as they did in the 80s, leading to a dramatic increase in mortgage payments for anyone that hasn’t locked in the rate.

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The Government - Happily Printing Money & Transferring Wealth


Deflation is a rise in the value of money. This translates into a persistent decline in the price of goods and services – as money becomes more valuable you can buy more with it, making it appear as though prices are falling.

Deflation suffocates any person, company or government with a high debt burden because the debt becomes more difficult to service with shrinking income.

Right now the government finds itself in a bit of a predicament - the average UK consumer is highly indebted and homeowners have large mortgages on properties which are decreasing in value. The government itself is taking on substantially north of £1trillion of debt over the next 5 years.

As a result the government CANNOT let deflation take hold. It is choosing instead to take us into high inflation.


Inflation is a fall in the value of money. It translates into a persistent increase in the price of goods and services – as money becomes less valuable you can buy less and less with it, making it appear as though prices are rising. This is the environment we have lived in for decades now.

So why does an inflationary environment appeal to the government?

In contrast to deflation, inflation bails out anyone with debt. If you had a salary of £25,000 and took out a £10,000 loan before a highly inflationary period, after several years of that high inflation your salary would have likely increased significantly to say £40,000. But the debt would remain the same at £10,000. The debt therefore becomes increasingly easy to pay back over time.

This is the approach the government is taking in order to bail out itself, indebted consumers and homeowners alike.

How Will Inflation be Ignited?

Despite cutting interest rates to almost zero, the government has so far failed to halt economic contraction. The government has now resorted to simply “printing money”. Nowadays this can be done electronically and does not require paper bills to actually be “printed”. The approach is often referred to as “Quantitative Easing”.

In early March the government created an extra £75bn simply by making a few key strokes on a computer. Quite literally, £75 billion has been created out of thin air. One minute it doesn’t exist, the next it does. That means that all of the pounds in our wallets and savings accounts instantly fell in value. It also means that anyone with debt received a small reprieve on their obligations to pay back their debts – they can use depreciated pounds to do so.

Given the vastness of this country’s debt, money printing will become a tool of first resort. Gradually, as more money is created and the value of the pound falls, the wealth of savers will be transferred to the indebted masses.

When Will the Inflation Manifest Itself?

At present, little of this new money is feeding through into the wider economy. It is being horded by banks which need to retain it in order to rebuild their balance sheets. For banks to lend money they must first feel strong enough to provide credit. Subsequently they must feel that consumers and businesses are sufficiently creditworthy.

While the flood of newly created money is building up within the walls of the banks we will see no inflationary effects feed through to the wider economy. But at some point the banks will once again be ready to lend and when the damn walls break a massive flood of money will wash out through the economy, pushing up the price of goods, services and salaries.

High or hyper-inflation, here we come!

Once the inflation has started, the government will find it extremely difficult to contain. Any premature reduction in the supply of money may lead to a new wave of retrenchment amongst psychologically scarred banks, companies and consumers, plunging us back into a depression. Also, since the level of consumer, corporate and government debt remains high, it will be difficult to raise interest rates up towards 10-20% in order to moderate the inflation - the interest payments would cripple borrowers and collapse the economy.

In my view this outcome is very simple and predictable. Once the newly created money is out there it is just a matter of time until it feeds through into the economy and rampant inflation ensues.

High inflation is coming - it is not a case of if, but when.

Below are a series of charts from one of the Bank of England’s own papers, which can be found here. The charts show the direct correlation between an increase in the supply of money and a subsequent increase in inflation over different time horizons for a sample of 116 countries. It is clear from the charts that the correlation between inflation and money growth is greater the longer is the time horizon over which both are measured. However, as we are seeing now, in the short run the correlation between monetary growth and inflation is much less apparent.

Relationship between money supply and inflation

What Does This Mean For You?

At any given time the British Pound is worth a particular value. You can buy something in the UK with it, or can exchange it into another currency and buy something abroad. So at that particular time there is a certain amount of goods and services you can buy.

As new money is created out of thin air, the number of British Pounds available increases, causing the value of each pound to fall by virtue of the law of supply and demand. Suddenly you need more pounds in order to buy the same amount of goods and services as you could before, or to buy the same amount of foreign currency. Also, your salary should rise. Instead of the current annual inflationary rise of 2-3%, perhaps your salary now goes up 10-20% a year. But this increase in salary is illusory, the increases will be necessary to simply maintain your standard of living.

Favourable Impact on Borrowers
Any debt payments you need to make will become increasingly easy to service as the inflation continues.

Adverse Impact on the Cash Rich and Savers
With each year that the inflation rages, the value of your savings will decrease. An annual rate of inflation of 10% means that the value of money has fallen 10%. So if you put money in the bank and earned 5% interest, but lost 10% through inflation, your wealth would have decreased 5% by year end. In effect, your wealth has been transferred to the borrower, to make their debts easier to pay back.

In a highly inflationary environment, which is what I foresee, and which is already spelled out by the ongoing increase in the supply of money, it is possible that savers lose substantially all of their wealth. At some point in the future you may find that the £100,000 of savings you stashed away for your retirement can only buy you a couple of loaves of bread.

People with large cash balances, retirees and pensioners are those most at risk during an inflation.

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What Can You Do to Protect Yourself?

Gold and Silver

I have been steadily converting my cash into holdings of gold at BullionVault and both gold and silver at GoldMoney. I consider gold as the ultimate store of value which will help maintain my wealth over the years ahead. I also consider silver as a store of wealth which, owing to the fall in world stockpiles, may outperform gold over the medium term.

Foreign Cash Reserves

I have also been transferring my pounds into a mixture of foreign currencies. GoldMoney, for example, allows you to hold balances in EUR, CHF, JPY, CAD and USD, although I would avoid USD as the US is embarking on the same inflationary approach as the UK. A variety of bank and brokerage accounts also give you the opportunity to hold foreign cash balances such as SEK, NOK, AUD and HKD. In times like these it pays to spread out.

The Property Triple Whammy

In the future, but definitely not yet, the stars may align and we may be offered one of the greatest property opportunities of all time. As you know, I see property values heading substantially south for some time yet. I can see interest rates being held down in order to stimulate the ailing economy. And as a result of the money printing, I see an inflationary flood at some point in the future.

By playing our cards in the right way, at the right time, we may be able to pick up choice properties and knock down prices, with a low interest rate mortgage, which will then be eroded away by the inflation. So in relatively short order, you could become the owner of a great property, at a bargain price, the mortgage for which costs you only a tiny amount each month.

These are likely to be the building blocks of my property strategy going forward.


It is too soon to venture back into the global stock markets. As an example, the current chart of the S&P500 is exhibiting a famously bearish pattern. We have already exceeded the correction seen after the collapse of the bubble and there is no reason to expect this trend to change.

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