House prices are falling. It’s official. The Halifax house price index for March this week revealed that the average UK house is worth £191,556. That’s a full 1.3% less than the £194,094 seen in March 2007.
Both Nationwide and Halifax now say that house prices are set to fall this year – although only by low single digits. And of course, argues the Halifax, this should be seen in the context of the 180% or so growth in house prices over the past ten years, so it’s not really that bad. And anyway, the fundamentals of the UK economy are ‘sound’, with low unemployment set to prop up the housing market. Chancellor Alistair Darling and Gordon Brown said much the same thing.
They’re all talking tripe. There is nothing ‘sound’ about the ‘fundamentals’ of the UK economy. The apparent prosperity of recent years has been built on easy lending. British consumers are more indebted than they’ve ever been (to the tune of around £1.4trn or so); while the City’s great success has been built on slack monetary policies fuelling a boom in ‘financial innovation’ – that is, finding more and more ways to boost returns, largely through reckless borrowing. But now the cheap money has dried up, leaving consumers and companies with massive debts, backed by assets of questionable value.
But what about those high employment figures? Won’t they ensure a soft landing at least? Of course not. It’s hard to believe that this rubbish is still being trotted out. As we have continually pointed out, employment is what economists like to call a ‘lagging’ indicator. In other words, employment data doesn’t start to turn down until after everything else has gone bad.
This makes sense. First credit dries up, then consumers run out of money to spend as they panic about negative equity and repaying their huge debts. As spending falls, so do corporate profits – and that’s when the job losses kick in. You just need to look at America to see this in action. Payroll figures have only now started to drop sharply, even though the housing market has been heading downhill for the past 18 months or so. And just as America is now almost certainly in recession, so the UK shall follow.
Is there any silver lining to all this? Well, the good news is that some countries’ economies have been built on more than cheap debt. Emerging markets may have difficulty ‘decoupling’ from America, but many of these markets – notably ‘frontier’ markets that haven’t seen the same media exposure as the BRIC economies – look very promising in the long run.
We’ve had a look at three of them in our cover story this week (see: Three emerging economies to invest in today). As for Britain, it’ll be useful for us to learn, once again, that rising house prices are a poor foundation on which to build an economy. It’s just a shame that the lesson has to be so painful.
Merryn Somerset Webb is away