Fundamentals such as affordability suggest a decent correction in house prices is pending. Key themes in our eyes include the speculative, credit and land-driven aspect of the recent upswing, which implies the correction on the other side will be deeper, more protracted, but also far more concentrated in some key areas. However, a portion of the adjustment will also be achieved via steady income growth.
We are asked repeatedly for our views on how deep the inevitable adjustment in house prices will be. Indeed, it has been remarkable of late to see how quickly sentiment has turned from expecting a correction where prices flatten (the house prices never fall brigade), to some sizeable declines now being flagged. As is usual with much of the commentary, a lot is uninformed, lacks substance, and the danger is that the herd takes over.
We must say at the outset that forecasting both the extent and timing of a trough in the housing market is probably nigh on impossible. The property market is so diverse, and in some cases regional specific, that a generic view of the entire market will not necessarily apply in most instances. We need to remember that the property market is not a "pure" market in the classical sense.
People simply do not sell unless they have to and prefer to ride out any periods of weakness. Rather than providing point estimates for any potential house price falls, we believe it is more useful to convey key themes that investors may find useful in making their own assessment.