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House Prices in 2013

It's time to write my predictions for what is going to happen in the property markets over the course of the next year. Basically, I am tempted to write "See last december's predictions, and simply change the date".

There is something about this wait and see that doesn't agree with me. We all know the western monetary system is about to implode. I just wish it would, so we could all get on with our lives instead of this eternal wait and see.

Greece has got more money, despite the fact that it can never pay it back, and German tax payers are beginning to find they are running a bit short. French and English tax payers have it up to the neck already. The whole eurozone is totally broke, and pretending it isn't is just plain stupid. So, we live in the stupid zone, a bunch of zombies waiting for the floor to collapse.

If it were one or two countries then things would be easy to predict, but since when was the last time half the world was broke? That's a bit of a poser.

The UK was reasonably alright until five or six years ago, but by 2010 it was approaching collapse level. It has since then gone insane with the national debt hovering at £1 trillion, and expected to be £1.5 trillion in another three years time. In short, England is well past any fiscal sense, and waiting for the floor to cave in.

The USA has such a massive debt that it has gone into the realms of science fiction. With all the unfunded liabilities it is approaching $100 trillion. That's hysteria level.

And then there's Japan, with a figure that we all thought was impossible two years ago. Since then it's gone way on up.

Okay, it's december, and it's that time of year, but what on earth am I supposed to say? I will try, but with a whole clutch of provisos.

There are three scenarios I offer you. The first is simple. It is a rational look at the property market using the normal metrics that I use. I will give you that this week. Next week I will give you another scenario. That will assume the floor caves in. The week after (just in time for Christmas) I will give you the third scenario. That will assume the fairy tale goes on. It is all I can do. Anyone who says he can predict the next twelve months needs certifying.

Let me remind you of the essential metrics that we need to analyse. Do remember, all other metrics are just hot air. It doesn't matter how many people want to buy houses; it doesn't matter how many immigrants there are; it doesn't matter which political party is in power, and so on. What matters is simply this: How much money is in the public pocket? How much money is your friendly neighbourhood bank going to dole out?  Is the economy going to move on up? Does the population feel upbeat?

First, let's look back. What did I say last year, and was I right?

Well, of course I was right, and I say "of course" because my analysis in not guess work it is based on science, and therefore it should be right unless I get my maths wrong.

I said that in the UK house prices would either stay the same or sag a little. They have sagged a little. They are down 1% on average across the country. Bullseye number one!

I said property prices in France would stay pretty much the same, but that the medium term looked dodgy. Prices have indeed stayed much the same, with a few spots showing small increases. I admit, that surprised me a little. However, with a change of government, and a reversal of some very necessary reforms, the near term future for France has turned from dodgy to very dodgy, and the long term future has turned to disastrous.

France has too many unfunded liabilities not to follow everybody else to wrack and ruin. In that respect the government's debt rating has been cut, and more cuts are forecast. I am willing to bet the latest round of house prices will show a decrease, and that if we can get the end of year figures I will have hit another bullseye. The only question here is, how long before the ratings get to junk status? I wont pursue that this week as that's getting into politics rather than economics.

French property prices should start to sag next year. Dont buy assuming a rise is on the way, it most definitely isn't. And you can take it from me that we have not yet seen a bottom in this market.

Spain has seen property prices drop pretty well in line with my predictions. I go from prices on the ground not the dodgy statistics the government puts out. They are phoney. I watch a selected set of price movements, and I log those movements, so I know what's happening on the ground. Prices have dropped by 10% as I predicted. Another bullseye! I predict they will drop further.

My preferred way of looking at these prices is to look at the tourist areas, and to see how those prices are behaving. Those of you looking at prices away from tourist zones should find prices holding up better, but only a little better. Tourist zones are being hammered. They will continue to be hammered.

I will give you the dreadful economic figures next week, but basically, Spain is a country where half the young are unemployed and a quarter of the rest are too. Property prices can only go down. If foolish foreigners weigh in thinking we have hit bottom, that's not my fault. The lift may have hit the ground floor, but dont forget the basements. We're heading there now.

Dont buy for rental in Spain, it wont work. The same goes for Portugal. Both rental areas are dead. You may be lucky, but just look at the rental sites: page after page of empty calendars. It's a renter's dream. You can get anywhere for €100 a week. At those prices who wants to buy?

On a local wage earner's scale, and also on a rental equivalent cash value, the average two bed apartment in Spain and the Algarve needs to come down to around €60,000 for an average area. Uplift as much as 50% for a nice area with good views, but no more. Anything priced over €100,000 is a rip-off and will lose you money. If you dont see what you want at those prices, simply wait.

I'm looking for another 10% drop here. I have been checking prices in a couple of places. The place I check on a quarterly basis is western Andalucia because it is just down the road from where I live. Three years ago I said prices would drop a further 10-15%. Then an average two bed apartment was selling for €130,000. A year later that price had dropped to around €110,000. Two years ago I said there was another 10% drop on the cards, and prices dropped to around €95,000. Last year I reckoned another 10% drop was on the cards, and prices have dropped to €85,000. I fully expect to see prices dropping till they hit €60,000 for an average place, with maybe as much as a 50% uplift on that for the nicer properties. I guarantee you will see those prices.

I am doing a trip around southern Spain next month. I will update you on prices when I get back.

I still like Southern Italy, and I will do a recce there early next year. I'm looking to spend mid january to mid february there, and have a good look around. I'll keep you posted. However, I think Italian prices may well stay in a close range over the next year.

I would not touch the USA at this stage unless you are buying to rent in the Bakken or Marcellus areas. They will make you money. I cant advise anyone to go to the USA at the moment as it appears to be turning into a police state, and it has 40 million folks on food stamps. That doesn't sound like the kind of place I want to be. But we are straying into politics again. The trouble is, the USA is a political madhouse at the moment.

I cant understand the wave of euphoria that greets Obama's dream to turn the US into another Europe. Hasn't he looked across the pond to see what a shambles this place is? And he wants America to go that route as well? Yikes!

Okay, that's a bit of general stuff. Now some particulars. I am only doing this, as usual, for the UK.

Let's have a look at those three basic metrics. First: how is the average UK pocket doing these days?

Actually, it is slightly emptier than last year. Wages are up about 1.8%, and inflation is up about 3.2%, which means the average pocket is lighter by 1.4% than it was a year ago. That means no-one is going to be chasing house prices upwards. The money isn't there to do it.

I dont have figures for the Affordability Index. They should have been out by now, but they aren't, so I have to go without. My own observations show that the index is roughly where it was last year, which means it is dangerously close to the maximum in most places, and is slightly over in many more. That means the room for price increases is non-existent.

I do look at my own auction index, but that is not so useful in a downward trending market. However, it is still in over-bought territory, although only just. In that sense it is in line with the Affordability Index. Bearing in mind that the economic conditions are bad, that is ridiculous. The index should be much lower than it is.

The next metric is the availability of finance. (No laughing at the back please.) We all know that bank finance is a shambles, and bank lending is still locked up. There is no sign of a change in the near future. That means house prices will not be rising any time soon as the money to chase prices upwards is simply not available.

According to Mervyn King, the governor of the Bank of England, the banks are sitting on too much debt, and that needs to be recognised, and its value written down, or written off. He is quoted as saying "In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake."

The writing down of asset values would include marking down the value of houses. So we have a serious negative here.

The third metric is the state of the economy. Are we out of the mire? Has trade turned corner? Unfortunately trade is held hostage to politics, and while that remains the case we are in a false market, and it wont move up. Our trading partners are as broke as we are. You dont increase sales to folks who are broke. We will therefore remain broke ourselves. This scenario will go on and on and on until someone shoots a few politicians or the floor collapses. I'm not taking bets on how long this play will run. What I will say is that things are not about to improve.

And there you have it. Every metric points downwards. How far downwards I dont like to say. However, since we are in a state of inertia, I would say that the downwards pressure is not that great, hence my prediction of more of the same.

Looking further to the future the main catastrophe will be the rising of interest rates. I dont see that happening in the near future as it would be a catastrophe for almost every government on the planet. That means I'll discuss that point when I discuss the political scene in a later bulletin.

To sum up: UK House prices down again, but not by much.


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