Dad's Army and the housing market | 45
-50%
-40%
-30%
-20%
-10%
0
Previous house price falls across the globe
CHART 4
Source: IoD
persist for a long-time. However, the UK economy is not in the
same position as Japan in the early 1990s, nor indeed the US now.
If the slowdown does turn into a recession, the negative
interactions with the housing market could produce a house price
crash. But we're not there yet. There are worries, of course. The
impact of the credit crunch and the collapse in
mortgage approvals and transactions is deeply
disturbing.
Policymakers are caught between a rock and
a hard place. The housing market is increasingly
deflationary, whilst the oil price spike is
inflationary. If inflationary pressures in the
wider economy prevent interest rate reductions
by early 2009, the downturn could intensify
beyond a 10 per cent fall.
There is also the added uncertainty of what
will happen in the buy-to-let sector. House price
falls should in theory increase the attraction of
renting over buying, but there is also the risk that
sustained price falls might trigger a fire sale of properties on to
the market.
A 10 per cent price fall should move the house price to income
ratio down towards 5 by this time next year � a more sustainable
level. By then, the interest rate cycle should also have turned,
providing further support to house prices. But I have one nagging
doubt. In the late 1980s, the house price to income ratio nudged 5
and then mean reverted to its long-term trend (indeed overshot
downwards). Let's hope it doesn't mean revert again!
Netherlands
1978-1985
-50%
Japan
1991-2006
-48%
Finland
1989-1995
-46%
Norway
1987-1993
-39%
Switzerland
1990-2000
-39%
New
Zealand
1980-1985
-37%
Denm
ark
1978-1982
-36%
Sweden
1979-1985
-35%
Policymakers are
caught between a
rock and a hard
place

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