What is the Smart Money REALLY Telling us about Future UK House Prices?

One of the less desirable aspects of the recent bull market in UK property is the rise of the ‘property expert’. These self-appointed oracles do not have good track records predicting market movements. Almost all of them underestimated the strength of the market during the upswing, predicting a ‘flattening’ of the market year after year.

So what are the ‘property experts’ saying now? Well considering that their impact (and hence market value) is rather less in a bear market than it has been recently, it is not surprising that they are much less bearish than many individuals! The general consensus at the moment is for a period of stagnation in house price inflation at worst. Fionnuala Earley, Nationwide's chief economist, is predicting that growth will drop to 0% by the end of this year. Likewise Simon Rubinsohn, chief economist of the Royal Institution of Chartered Surveyors (RICS), is predicted zero per cent growth for 2008. The pundits on the talk show sofas are generally pushing the same message. A ‘flattening’ but no outright declines.

But what is very striking is that as you get closer to the ‘smart money’ you find a more bearish picture emerging. Goldman Sachs predicts a fall of 5% in prices in 2008 and a further 2% in 2009. And these were the guys betting against US sub prime mortgages before most.

When people really have to put their money where their mouth is, the picture looks even bleaker. There is now a blossoming market in property ‘derivatives’ traded by professional investors. They speculate on the future price of the Halifax Property Index (HPI). The prices they predict make disturbing reading. As of January 2008, they predicted a general price decline of at least 9% over the next year, increasing to 11% over three years. Amazingly, in 5 years time, the market predicts that UK residential property will still be 11% below where it is today. If we assume (very conservatively) retail price inflation of 2% a year that means that UK property will fall by more than 20% in real terms over five years.

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How can such negative predictions be squared with the prognostications of the ‘experts’? The real answer is that they can’t. There is an old saying that ‘talk is cheap’. Property experts don’t want to be turkeys voting for Christmas, and so they are desperately exhorting people, a la Corporal Jones, not to ‘panic’. But the reality is that none of these commentators are actually betting on it! And those that are, are betting on a pretty bumpy ride for quite some time.