Will house prices ever recover?

Commentators have been competing to produce ever gloomier property market prognostications for months, but now we have a clear winner.

Last week, City bank Numis Securities trumped all rivals by claiming among house prices would fall by another 55%.

Yes, a mighty 55%. That's on top of the 21% that the UK housing market has already fallen from its peak. What's worrying is that this prediction wasn't made in some headline grabbing press release, but in a private note to clients.

My gut feeling is that they have overdone the doom, but then, I thought the FTSE 100 would bottom out at 4400, and now some analysts fear it could drop below 3000. If house prices suffered a similarly calamitous drop, then yes, I guess we really could have a further 55% to go.

From NuLab to Numis.

Numis argues that house prices are overvalued by between 17% and 39%, but given that markets typically over-correct on the way down, as property did in the early 1990s, they could fall by 40% to 55%.

This would see the average house price falling from £160,327 today, according to Halifax figures, to just over £72,000. This is back to 1998 levels - as if the noughties never happened.

Numis also suggested that there was "a very real probability" that Britain could go bankrupt, but let's not get into that now.

Wipeout

So what would a house price wipeout mean for all of us? Well, it would mean a massive destruction of "wealth", on top of the £40,000 that PriceWaterhouse calculates the average adult has already lost since July 1997. Even if much of that wealth was illusory, that's still going to hurt.

And it is the older generation - and their dependants - who will hurt most. Especially if they were relying on the equity in their property to fund their retirement. The one in three people nearing retirement who haven't paid off their mortgage could be dogged by that debt for the rest of their days.

They owe £37,316 on average, according to Key Retirement Solutions, and won't be able to clear that by downsizing or signing up to equity release. And as the interest rolls up, it could soon dwarf their property's value.

Hundreds of thousands of younger homeowners will throw in the keys, as they see their 95% LTV mortgage rise to around 200%. Refinancing will not be an option.

Britons are among the most indebted people on the planet, and now we won't have the assets to back it up.

No future

And what if property prices don't bounce back for years, or even decades? It could happen. The massive wealth implosion of recent months won't be reversed in a hurry.

The ageing population means that there won't be enough young people around to kickstart any meaningful house price recovery. Especially since many will be burdened by student and other debts - and desperately seeking a job.

The younger generation will also shoulder a massive tax burden to cover Gordon Brown's bailouts and spending commitments, and the tens of billions in corporation tax receipts that the Exchequer won't receive in a recession.

High levels of immigration could take up the slack, although the numbers might reduce if the Tories come to power.

The world has changed in ways that we haven't yet begun to understand, and normal service will not be resumed anytime soon.

Particularly if Britain really does go bankrupt (although I can't imagine it will).

It's all over now

If the housing market doesn't spring back, many of the assumptions on which we have built our personal finances will radically change.

Property will no longer be seen as an investment, let alone as a pension. Most people will see their home as a place to live instead.

We will stop feeling rich off unearned property wealth, and start to feel tediously poor. There will be no more dipping into spare equity, because we won't have any.

Those with any sense (and spare cash) will frantically start investing for retirement in a proper pension, but many will simply give up and claim their state benefits.

The buy-to-let market will return to what it always should have been, a niche investment for professional landlords, rather than a fast-track to millionaire status. One and two bed flats will be sold to the people they always should have been sold to: first-time buyers.

Property mania will go down with canal mania and railway mania as an historical footnote.

And anybody who rushed to bag a bargain after the market had fallen 21% will feel as clever as I did, after diving back into shares last autumn when the FTSE hit 4400.

Cheer up you lot

This is the doomsday scenario, but it probably won't come to this. There are still some signs of life in the market. Buyer enquiries have risen for the last four months, and stocks of unsold properties have now fallen to a 12-month low of 26%. Halifax sees signs that activity is beginning to stabilise, although at a very low level.

What's more, the housing stock is still low, Britons are still hooked on property, it's just that they can't get the finance.

Only time will tell whether these are the final death throes of the old system, or signs of continuing life.

But so much of our economy was built on the illusion of endlessly increasing house prices. You don't have to be as pessimistic as Numis to see that this model has been shattered, and won't be pieced back together for at least a decade.

And nor should it be. Look what happened last time.

More: House prices will carry on falling

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