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Where is the UK housing market going?

The news is still of falling house prices and expectations of more to come. Nationwide report a drop for every month of the last nine. An estimated 145,000 mortgage holders already owe more in mortgage payments than their houses are worth, according to research undertaken for the Daily Telegraph. Since the peak in October last year, the average house price has fallen from £186,044 to £172,415, with house prices now falling for eight consecutive months, according to Nationwide. But this is not good news for first time buyers because there are tight constraints on lending. Which is presumably a major cause of the drop in prices.

The volume of sales is said to be at an all-time low, with Halifax predicting a 45% drop in mortage approvals for 2008. This has caused problems for house builders: Taylor Wimpey suffered a 50% drop in share prices on 2 July. These difficulties are already having repercussions for the wider economy, as major expenditure on furniture, consumer durables and refurbishment tends to take place when houses change hands.

Higher energy prices are a further factor which is likely to lead to economic downturn. Again, this too is something which it would be easier to weather if LVT was in place. As things are, land values are “sticky downwards” – they do not respond to the reduced rental yields caused by the higher input prices, and instead, sites are liable to just go out of use, which is the usual observation during recession.

Almost nobody apart from LVT advocates is acknowledging that the house price slump is is really a drop in land prices, which makes it impossible to appreciate what is really going on, and, one might hope, to introduce policies – including LVT – which will get the UK out of its problems as quickly as it might, and to prevent a recurrence in the future. Only LVT will break the unhealthy and damaging link between the land market, the banking system and the general economy. But there is no need to be an LVT supporter to realise that the underlying theories provide a better model of the economy than those more generally accepted. Advocates such as Harrison, who predicted the 1991 crash long before it happened, have an excellent record of predicting how the economy will perform.
Read about Harrison’s prection of the crash of 2010

There is a range of predictions being give about the eventual size of the fall. It depends on how the Bank of England decides to set interest rates in its attempt to control inflation. Lax control means that inflation will lead to a catch-up; a tight control will result in a larger drop. The key figure to look at is rentals. The primary value of property is its annual rental, since property purchase is in principle the purchase of an income stream. Multiply them by a figure between 4 and 6 gives the realistic range within which selling prices lie.

The spare capacity in the economy means that it would be a good time for the government to spend on infrastructure, if only there was a system of land value taxation in place, as the Campaign advocates. Without such a system, the infrastructure improvements are absorbed into land values and capitalised into land prices. The government gets little back for the money spent, which means that it has is little incentive to improve the UK infrastructure, which is a frequent comment of criticism by people from mainland Europe who have been to Britain.

The sharp drop in selling prices is a useful warning to LVT advocates who believe that it does not matter if assessments are based on annual rental values or selling prices. It is the latter that have been so dramatically affected. Domestic rental values have remained quite stable, in fact they have increased a little in some areas, though that would change if the general economy goes into recession, which is possible.