House prices about to crash

At a recent roundtable of top economists at the Long Finance Group together with a think tank of leading City professionals, the over whelming view was that house prices were certain to crash. Timing was debated but it was generally thought that the current housing market index was not sustainable beyond this year. The election in the UK was likely to become the catalyst for a severe cold shower of cost cutting that will impact the general economy forcing down the demand for houses.

The view in the audience was that a hung Parliament would be the worst outcome for the housing market and the weekend poll results indicate that is the way it's going. Even if either party gains a majority, the size is likely to impede policy for the Government.

Last weeks Government Long Bond sale was at an increasingly high interest rate, which reflects the diminishing rating of UK PLC in the worlds markets. The Bank of England has virtually no leeway to influence neither the markets nor the economy with ½% interest rate boxing it in. It is dammed if it raises the rate and now dammed if it doesn't.

The idea to divorce the Bank of England from Government policy was Brown's first big move, when New Labour under Blair, first took office and I think it's still a good decision but it does mean that the Bank of England and the Government's strategy needs to be pulling in the same direction. I wonder how fraught the relationship between the Bank of England and the Government is today. The economic situation and the diversion of the coming election appear to have created inertia. Difficult decisions need to be made and implemented and the Government is increasingly tightening the knot around its own neck. This is something markets recognise and will make hay with. Expect the run on sterling to continue and as the currency falls the pressure increased on interest rates.

Here is the rub then and why eventually whatever the Bank of England or whatever action any Government takes, it will hit house prices.