British Property Prices could fall another 55 percent

Numis Securities, a City investment bank, expects amateur buy-to-let landlords to begin "panic selling," their investment properties as house values continue to decline in the UK, causing the average home value to fall below £100,000. Their recent report stated:

Despite UK house prices already having fallen 21% from the peak, we do not believe that the correction is anywhere near over.

Our core headline forecast is that UK property prices remain between 17% and 39% overvalued based on fair valuation. Moreover, history has shown us that when property…which has experienced a price bubble corrects, the price tends to fall below fair value for a period of time, as confidence in that market remains low. Prices could fall a further 40-55% if the over-correction was as bad as the early 1990s in our view.

It is the action of these amateur investors over the next few months which we are most concerned about.We expect some to begin panic selling their portfolios, with the peak volume as is almost always the case with private investors, being at the market trough.

The report warns that “city centre flats” and “new executive homes” are likely to record the biggest reductions and describes investing in buy-to-let property as a “poor man’s hedge fund," which is not far short of the truth. The buy-to-let market is heavily over-supplied at the moment with many sellers, unable to complete adding to the inventory and rents continue to decline, with the worst results being seen in areas previously reliant on the financial services sector. According to findaproperty.com, the amount of rental properties advertised on their site has risen 100% in the last month.

Like myself, Numis is heavily critical of the government's panic-induced attempts to re-inflate the housing bubble, and suggests that the Prime minister and Chancellor stand a very real chance of putting the country into bankruptcy with their increase in money supply, otherwise known as "printing money," and exhortations to raise lending to 2007 levels:

The bankruptcy of the UK is a very real probability as the UK Government is trying to stimulate a greater debt burden in a grossly indebted economy. We believe the scale of the macro imbalances in the UK means there is no prospect of a recovery in 2009 and we expect the UK to be mired in a deep recession through all of 2010. The Prime Minister and Chancellor have publicly stated that they want banks this year to lend at 2007 levels. We think this is a crazy policy, given that too much debt was one of the prime reasons why the economy has its current problems.

Another issue I see is the fact that the nationalized banks are now being used to implement government policy - not banking policies and further conflicts are inevitable. How Gordon "no more boom and bust" Brown expects to cut taxes, increase money supply, make the banks lend again and at the same time raise lending standards all at the same time is a mystery to me. And judging by the value of the pound, a mystery to every one else as well.

Any fool can see we need to bite the bullet, nationalize all the banks, break them up into smaller banks, sell them off, suck up the deflationary period and get back to rational banking practices. If only David Cameron had the balls to stand up and say so.