House prices falling – all doom and gloom?

The doom and gloom that pervades in the UK economy at the moment is exerting a heavy impact on the housing market – in fact, there are many who cite the wilful granting of excessive mortgages as the core of the current financial crisis.

falling house pricesThis is somewhat unfair as, although it is clear that banks have been lax of late in controlling lending, the root of the problem lays with general mismanagement, with the housing market a convenient scapegoat.

Reports over the last few days have predicted an imminent crash in the value of houses, with some sources stating a loss of up to 35% over the next two years. Should we reel in horror at this prediction, and dig in for the duration, or should we take it with a pinch of salt and accept that, while values are clearly due to fall, it is not possible to predict by how much?

To be honest, the latter is the better suggestion as, while caution is necessary, being over pessimistic may well be detrimental to the overall effect.

Estimates as a guide

Capital Economics, the consultancy that predicts a 35% drop in prices, has had to revise figures to meet the current effects of the general financial market. Consultancies do this all the time and, it must be remembered, the figures they present are estimates, based on current trends.

The more doom-laden of consultants are forecasting a big increase in repossessions as home owners find it hard to repay their mortgages, but this needs deeper investigation.

Are salaries going to fall thanks to the ‘credit crunch’? Of course, there will be those who are unfortunate as companies are forced to cut staff, and the government is saying that unemployment will double in time, but if your job is secure – and most, not the minority will be – a prudent and sensible tightening of the belt may well be all that is necessary.

2011 economic recovery

The forecasts go beyond the two year period, and expect that 2011 will see a levelling out period for housing prices, with recovery due after that. As we are nearing the beginning of 2009, the question you need to be asking is ‘can we hang fire for two years’?

Selling a property right now is going to be very difficult, and sales are down by almost half over figures from early this year, but again that is a skewed calculation – winter is never the best time to sell a property, and the pick up comes in the spring. It will be interesting to see whether the market makes any sort of recovery in the early months of 2009.

We can, then, be certain that some value is to be wiped from our properties, but how much we can not be sure of. If we take the consultants view that 35% will be stripped from prices by the end of 2010, then a house valued at £200,000 now will have a market value of £130,000 in 24 months time.

This may sound drastic – and remember, it’s an estimate – but the golden rule must be to keep in there, as we have no idea how the market will fare in the next 12 months, never mind in two years.

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