And now for the bad news
Finally some light at the end of the tunnel for the finance industry but expect unemployment to rise over the next 12 to 18 months
The chart shows that UK house prices are expected to fall until 2010. At this point they will be 40 per cent lower than their peak in August 2007; potentially very bad news for anyone that bought a house in the UK last summer. Worse still, according to these derivative prices, the Halifax index will not recover to its August 2007 level until 2023. So that's the bad news for those in the UK - households and corporates - that have become addicted to the drug of ever rising house prices over the last few years.
But there is some good news too. This correction will make UK properties affordable once again. Chart 2 shows how the average house price to average earnings ratio will decline as house prices (represented by the derivatives on the Halifax index) fall, assuming that earnings rise at an average nominal rate of 5 per cent a year. By 2010 the house price-to-earnings ratio would be much closer to a sustainable level; in fact, very close to the old style mortgage multiples that lenders used to apply.
In pre-credit bubble days lenders were often only willing to lend borrowers a maximum of three times their salary, or three times the main salary plus one times the second salary for joint borrowers. Last year it seemed that any school leaver could borrow 10 times any salary they cared to make up. Thank goodness those days are gone … for now.
Andrew Clare is a professor of asset management for Cass Business School and a director of Fathom Consulting