Lies, damn lies and UK politicians

The Victorian British Prime Minister Benjamin Disraeli once famously remarked that there are: 'lies, damn lies and statistics!' His modern successors in the UK are continuing this venerable tradition by trotting out endless upbeat figures at a time when even the man-on-the-street is beginning to feel the pinch.

As The Economist noted last week, UK housing has become horrendously overpriced. Yields have fallen to around 3%. Now as yields are comparable to earnings on any asset, it is not hard to see that 3% is very low. This correspondent used to achieve above 15% on a London house in the mid-1990s.

To square this position rentals have to go up, or house prices go down, or both happen at the same time. This process of adjustment has started with a slowdown in home sales which is resulting in a bigger demand for rented properties and higher rents; meanwhile, the more expensive end of the market has seen real price falls since last August, and total UK mortgage applications have slumped by an incredible 40%.

But it does not need much imagination to see that the adjustment has to be much bigger to bring the return on house prices back in line with other asset classes. We could be looking at a Hong Kong style collapse; after the handover in 1997 prices fell by 50% and then moved as far as 70% down and are still 30% below 1997 levels today.

The problem is that house price adjustments of this kind will have a devastating impact on the UK's domestic economy. The Treasury maybe optimistically forecasting 3.5% growth in GDP, just as it did in 1990 before the worst post-war recession in the UK, but the man-on-the-street sees a different picture.

High Street store sales last Christmas were at an 11-year low. For once consumers stop buying houses they spend less on household items; they also become nervous if they think their main asset, their house, is falling in value and spend less in the shops.

Given the importance of consumer spending to the domestic UK economy, and you have to ask yourself; why are share prices so high? In such a deflationary environment profits will clearly come under pressure, as people will cease borrowing against their homes to finance current spending and save more for a rainy day.

Finally, it has to be said that the UK has just experienced its longest-ever economic upturn. But economies move in cycles, so should we not expect a huge downturn to follow?

The economy really ought to be a major issue in the next General Election, which many predict will happen on May 5th. But the Government will cleverly rely on people's fond memories of past economic glory triumphing over the dismal reality of today. Nobody wants to listen to bad news on UK housing in particular, and politicians can play on this.

For those that have not sold out of their UK assets then this is perhaps the last opportunity to do so. A major recession is just around the corner, and this article has taken no account of the impact of high oil prices.