Spending cuts will slash house prices in these towns

The Government cuts will hit house prices hard in the towns that rely on the State.

Now that the Government has published its spending review, we have a better idea of just how harsh some of the cuts will be, particularly to employees of the public sector. An estimated 490,000 jobs will go over the next four years, equivalent to around one in ten jobs disappearing.

The Chancellor reckons that the bulk of these will come from employees moving to alternate employment and simply not being replaced, rather than through redundancies, which seems a tad ambitious.

And if he’s wrong, there could be a serious impact on the towns where there is significant public sector employment, particularly on house prices.

What cuts mean for house prices

As we are about to discover, certain towns enjoy a very high proportion of public sector employment.

The Government believes that as the public sector shrinks, the private sector will pick up the burden as the economy grows. That’s a lovely idea, but as the tables below show, certain towns that will be most badly hit by these cuts are not exactly the obvious place for businesses to start up and the Government has not yet explained what it will do to encourage businesses to ignore traditional areas like the South East and instead start up elsewhere.

Certain towns may suddenly have a fair proportion of inhabitants without a job. This can lead to them falling behind on their mortgage payments, and possibly repossession. What’s more, if the private sector does not pick up the slack, the lack of employment in those towns will dampen buyer demand, further pushing down house prices.

Not good news for Oxford

Property information site Zoopla.co.uk has put together some research on which towns in England and Wales are most reliant on public sector jobs.

And Oxford is the town most likely to be hit hard by changes to the way the State operates, with almost half (46%) of its workers currently employed by the public sector.

Let’s take a look at the top 20 towns boasting the highest level of public sector employment

A few of these results took me a little by surprise. Whenever there is discussion of the areas most reliant on public sector employment, there tends to be a focus on Northern towns. However, reliance on such jobs is far more widely spread across England and Wales, including areas as diverse as Cambridge, Merthyr and Lewisham.

The safer areas?

What about the other end of the scale, the towns least reliant on public sector employment? The table below runs down the local authority areas where house prices in theory will be least affected by the cuts.

As you can see, there are plenty of areas in and around Greater London on this list, and not that many north of the Watford Gap, which in theory should see their house prices escape relatively easily.

How ironic that the City of London, which helped get us into this mess, is likely to escape unscathed.

The knock-on effect

I have no problem with the theory behind the research. I’ve got no doubt that towns like Middlesbrough and Denbighshire will indeed suffer badly as a result of the Government cuts. However, what the report does not take account of, and in fairness it can’t really do so, is the knock-on effect on the private sector.

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The inescapable fact is that many private businesses rely on Government contracts, and the spending cuts won’t just affect the relevant departments, but also the many private companies that service those departments. According to PriceWaterhouseCoopers, in addition to the 490,000 job cuts in the public sector, the cuts will lead to a further 500,000 cuts in the private sector across the nation.

So while the towns in the first table will be the first to be sharply hit by the cuts, those in the second table may not be as safe as Zoopla’s study suggests, if they are home to firms servicing the public sector.

A grim time for house prices

The potential impact of the Government cuts is just the latest in a succession of question marks raised over the future of house prices in recent weeks.

First, as discussed in Secret new rules set to reduce house prices, it emerged that the FSA’s Mortgage Market Review changes would lead to a reduction in mortgage lending, and as a result house prices would also take a whack, a fact even the regulator acknowledges.

This was then followed by the latest Halifax house price index, which found that in September house prices fell by a whopping 3.6%, the largest monthly fall in 27 years! They were far from alone, with the Royal Institution of Chartered Surveyors reporting three straight months of house price falls, blamed on homesellers clearly outnumbering those looking to get onto the market.

That’s reflected in the fact that according to the Council of Mortgage Lenders, gross mortgage lending figures have been at ten year lows for the past two months in succession.

So basically, the cuts will not do house prices in these towns any favours, but don’t kid yourself that living somewhere else means you’ll avoid some house price pain in the near future!

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