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To: maceng2 who wrote (416)	9/6/2003 3:04:13 PM
From: maceng2	Respond to of 1417

Forecasts lead home buyers up garden path By Ed Crooks Published: September 5 2003 21:59 \| Last Updated: September 5 2003 21:59 news.ft.com "House prices to crash", scream the front pages. "House prices to soar", they proclaim a little later - sometimes, it seems, in the very same newspapers. As their readers should be able to deduce, these predictions are good for nothing but chip wrappings. The housing market, like any other asset market, regularly makes a mockery of predictions. In 1991 Halifax, the mortgage lender, forecast a 5 per cent rise in house prices for the year. The outcome was a fall of 3.5 per cent. In 2002, it was again predicting a 5 per cent rise. The outcome was an increase of more than 26 per cent. The recent upward revisions of their forecasts for this year's house price rises from Halifax and Nationwide, the building society, are hard to gainsay: there is not much of the year left. But longer-term projections should be taken with a sackful of salt. As Mervyn King, governor of the Bank of England, disarmingly admitted when making a forecast of slowing house price growth last year: "The probability that the outturn will be close to the central view is zero." What economists can say something useful about, on the other hand, is what is happening at the moment, and what are the risks for the future. The good news is that, as measured by the new Financial Times index, house price inflation has clearly slowed. The longer prices kept rising at the dizzying rates seen at the turn of the year, the greater the danger of them subsequently plummeting to earth. The bad news is that by historical standards house prices still look worryingly high. Relative to average earnings, average house prices are close to their levels at the peak of the last boom, at the end of the 1980s. True, there are plausible reasons why the sustainable level of house prices might have risen. If interest rates are more stable than in past decades, then borrowers may feel comfortable about loading up with more debt. Similarly, if unemployment is more stable and the risk of job loss is lower. And the slow rate of housebuilding, snarled up by planning restrictions, has probably meant that over time the relative price of housing is being driven up. The question is whether these factors can justify a house price to earnings ratio that is half as high again as in 1997. The suspicion among some economists - including, it seems, Mr King - is that too many borrowers may have been seduced into over- extending themselves by interest rates at a 48-year low. The real interest rates, allowing for inflation, have fallen, but not by nearly as much as nominal interest rates. Borrowers may not have fully realised that rising wages and prices will not inflate away the value of their debts the way they have been expecting. Mortgages today may seem cheaper than they really are: the same way a 25-year mortgage looks cheaper than a 15-year mortgage, because the monthly repayments are lower. Eventually people are likely to realise that, and when they do, house prices will probably fall back relative to earnings. Whether that means a period of slow growth in house prices or outright falls is uncertain. The last two property booms ended in steep falls in real terms, which in today's low-inflation world would mean falls in nominal terms, too. But a study for the International Monetary Fund, published in April, found that house price booms were followed by busts only 40 per cent of the time, and that on average a country could expect one housing crash every 20 years. On that basis, Britain is not due its house price disaster just yet. The analogy with the tech bubble of the 1990s is instructive. Quite a few analysts could see that it was going to burst, but anyone who acted on their advice too early would have missed years of spectacular returns. By the beginning of 2000, the sceptics appeared to have been routed. And that, of course, was precisely the point at which the market began to topple over