Peter J. Cooper’s Weblog

Everybody has been shocked by the sudden crash in the UK housing market over the past couple of months, as the reaction to the republishing of my two month old article on the subject showed yesterday which delivered another record day for traffic to this blog.

As a property journalist of two decades standing – with some successful property calls under my belt – it therefore seems only fair to flesh out what was a very broad-brush prediction: namely that the selling prices of houses will fall by 60 per cent in this downturn compared with 38.3 per cent in 1991-3.

The latter figure does not correspond with official figures for 1991-3 but is based on my own experience of price movements in London Docklands; the average across the nation might have been less but I have my doubts. A reader yesterday commented that he recalled a 40 per cent fall in Bath, and it is more likely that the official figures did not record changes in actual selling prices correctly.

I am afraid I have to agree with MoneyWeek’s editor Merryn Somerset Webb whose latest TV appearance is posted on this site. UK house price adjustments will be sharply downwards over the next six months as people who really need to sell are forced to accept lower and lower prices. But do not jump back into the fire too quickly. To mix the metaphor the lesson of the early 1990s was that a falling knife has to stop falling first.

As the business editor of Building magazine I can remember advising a colleague to buy at the end of 1991, and by the end of 1992 he had handed back his keys to the building society and skipped off to Australia. That was not my best call. Prices carry on falling when they start and calling the bottom is tricky, although not nearly as hard as calling the top.

You also have to appreciate that the UK economy is going to go through a particularly rough patch. High oil prices mean the return of stagflation and the squeezing of business profit margins, and not just the airlines. As business becomes less profitable stock markets fall and jobs are shed. At the same time we have a weakened banking sector that is unwilling to lend and this is going to make the downward spiral stronger, particularly for homes where lending has crashed, and UK expats can not get mortgages now without a 40 per cent deposit.

The reason I bought a house in March 1993 – which turned out to be the month prices started to go up rather than down – was that the pound fell out of the ERM in late 1992. You might remember that was when George Soros made a billion betting against the pound. For me that was a highly positive signal for interest rate falls and that meant eventually house prices would recover.

That proved true but I was very nervous that inflation might take off with devaluation, so much so that I tracked down Mrs Thatcher’s former chief economic adviser Alan Walters after a speech in London and asked him whether the devaluation of sterling meant inflation. He told me that bluntly money supply growth was so weak that there was absolutely no possibility of inflation. I went off and bought the house.

So eventually this house price slump will find a market bottom and there will be some economic event that marks the turning point. It was the pound’s exit from the ERM in late 1992, and I spotted it. I can remember telling my brother about the importance of this signal one Sunday at lunch and then driving back into Docklands to see if any houses were for sale.

Alongside a deserted, windy canal I pulled into Wolfe Crescent which I noticed was being developed by a company known to be in acute financial distress. The sales lady was extremely bored and surprised to see me: one of the few customers in months. ‘They might take an offer’, she kindly hinted and got my rather low one a few days later. I went to my building society the next day and they had to go off to find an application form in a backroom.

This is a market bottom. But housing markets are slow to adjust to reality and it could take another couple of years to get there. I hope my colleague who bought too early has had a better experience in Australia but he had a lovely wife which was more than I had at the time!

More seriously my lesson from the early 1990s is that this can be an opportunity if you wait your time and buy wisely, and for everyone else that if you hold on to property you will be alright in the long-run. Prices recovered by 1998. It was the same in the 1970s: prices crashed in 1975 but had recovered fully by 1979 at least in nominal terms.

What would signal a change in the market direction this time? First, I suppose the pain has to run its course, and prices overshoot on the downside as markets always do. Then you need something to happen that makes buying a house cheaper, like a fall in interest rates. It will happen again but not for some years given the inflation outlook with oil prices remaining high.