History doesn’t repeat itself but it sometimes rhymes

Well it eventually arrived and arrived in style. That is of course the housing market smash. What was most surprising was how long it was allowed to move beyond a reasonable price before it imploded.

Perhaps more surprising is the lack of activity from the government in slowing such a runaway train.

But inflation and the economy appeared to be more important, they said. One month ago they said they would not be concerned about moving interest rates to stabilise the economy and house prices, and now we have a 2% drop in interest rates!

I am confused, not least by the mixed messages but also by the fact that most of this was very predictable. Remember in this column last November we said that rates needed to plummet, as inflation was actually driven by purchasing of commodities and not supply and demand. We reiterated that point only a month ago and forecasted rates needed to go to 3%, and soon.

Sure enough within a month we are there already and rates may need to fall further now although I don’t expect by much.

In any event many of you may not be able to benefit from further rate drops due to some fine detail in your tracker rates. It appears; sneakily some lenders have buried a nice capped rate in their literature. The standard line simply says that rates will track the bank of England base rate but will not fall below c3.5%, a point that will not be welcomed by many borrowers when it happens.

In the meantime nothing can support the housing market as sentiment has now taken its toll, and most investors and homeowners alike have simply turned away.

Confidence is rock bottom; when that happens investments typically have to go beyond a fair price before they become interesting again. We are some way off that point, but you may find the low point in the next twelve months.

You may remember last month I said that it takes about 18 months for alterations by the bank of England to make their way through to the economy and that 18 months from the expected general election in May 2010 is November ‘08 so expect some solid activity then. Sure enough, almost by script we had it.

Within the next two to three months, information will also come through that inflation is plummeting, as those who have sold their commodities have driven the price south, nothing to do with supply and demand I might add.

That will provide a welcome break for the economy but with the threat of deflation looming, the government will have to put cash in the pockets of the public to stimulate spending. I suspect tax cuts will be a short-term winner followed by tax increases for the wealthy.

In the meantime the stagnant housing market stagnates further. Just like it did in 1989, when the housing market flattened for seven years, this will be no different. ‘History doesn’t repeat itself but it sometimes rhymes’.

But what opportunities will arise in between? Consider that most people like a little change in their life now and then, and with a stagnant housing market and the best price you can get coming from a bargain hunter many are staying still.

You can easily see why home improvement companies will be busy. Take a house valued at £300,000: The cost of moving is massive. Stamp duty alone is £9000. Add estate agent, solicitor, mortgage, financial adviser and moving fees and you will have waved bye bye to £20,000 for the joy of such a stressful event.

In effect the market will be self-stagnating until such costs are removed. Instead the consumer will decide to have a £20,000 discount on their next kitchen, conservatory or extension. With such low mortgage rates look out for a surge in those seeking a home improvement loan and the impact it may have on the share prices of home improvement companies.

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Tags: economy, house prices, housing market, inflation, interest rates

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