Barclays Boss says housing downturn is only half done

The CEO of Barclays Bank John Varley has painted a pessimistic picture of the likely path for UK house prices over the coming year. In an interview with Sky News he forecast that average prices still had a long way to fall with a fifteen per cent decline likely over the next twelve months.

He is quoted as saying:

“The negative house price inflation started in 2007, it’s accelerated in 2008. We’re probably about halfway through that period, so in other words we’ve got another 10% to 15% to fall between now and the end of next year.”

House prices are declining for a mixture of economic reasons and, over time, certain factors have a bigger influence and impact on the market than others. In this sense, the property recession will go through a number of stages before we hit the trough and a recovery in housing market activity can happen.

Low affordability – in the early stages of the downturn, demand for many properties seeped away because they had simply become unaffordable for hundreds of thousands of people. This was seen in the tail-off in demand from first-time buyers whose effective demand had been wiped away by the decade long housing boom.

Rising mortgage rates and the credit crunch – a second stage of the boom came with the impact of the credit crunch (which itself was a function of the sub-prime mortgage crisis which spread from the United States to many other countries). The supply of mortgage finance was reduced and the era of low-interest rate deals offering mortgages of up to 100% of the purchase price (sometimes more!) came abruptly to an end.

Changing expectations – once it became clear that prices had peaked and were starting to fall, expectations of agents in the market turned around rapidly. Speculative demand for property tailed off and the construction industry has cut back on the number of new homes being built. There are numerous property developments mothballed and left partially completed especially in cities where big investments have been made to construct flats for buy-to-let investors.

High prices, tighter credit and worsening expectations – these have been three important factors in the early phases of the property recession.

But the next stage of the downturn could be even worse.

And this despite the huge cuts in official interest rates by the Bank of England which are showing through gradually in cheaper mortgages. And also the reductions in stamp duty announced by the government earlier this year.

The next phase of the property slump will be dictated by macroeconomic factors and particularly the scale of the inevitable rise in unemployment.

John Varley at Barclays has said that he expects unemployment to rise by over 700,000 during 2009 with further rises likely into 2010 – remember that unemployment tends to be a lagging indicator of the economic cycle.

As employment falls and unemployment rises, there will be a major impact on the property market. Home repossessions will increase (prompting a fire-sale of properties) and many others will try to sell their house before repossession becomes a reality. With unemployment rising and real incomes feeling the squeeze of a recession – demand for property will remain low - adding to the downward pressure on prices.

To many observers – all of this is a long overdue and totally necessary adjustment in the market following a frenetic boom which was allowed to move out of control. The housing market like the economy is cyclical and a turning point will be reached. But with each passing day it becomes clear that fundamental macroeconomic factors – jobs, real incomes and confidence – will drive the market in the near term rather than any attempts at palliative measures by the government or the mortgage lenders.