Today it was announced that UK GDP fell by 0.8% after a fall of 2.4% in the first quarter of 2009. But what does this mean for the green shoots of recovery some have referred to and how does it affect house prices?
The previous comments of “green shoots” have been somewhat speculative, there is too much uncertainty to talk of green shoots with any confidence. One of the key factors, which has yet to have its full impact on the UK economy, is the rising unemployment. No one can forecast with certainty but there seems to be a degree of consensus that unemployment will reach its peak of around 3.2m during the second quarter of 2010 – so we have around 9 to 10 months of increasing unemployment to come. Clearly as more people lose their jobs it is going to have a negative effect on the economy.
The next point to consider is how the GDP figures is derived, for example not all parts of the UK economy are affected in the same way. The data that particularly stands out is the sharp contraction in construction which reportedly contracted by 2.2.%, much more than the overall 0.8% for the wider economy. This contraction in the construction sector reflects what is still being experienced in the property market – falling house prices.
So what about the future of house prices? The best estimate for the next 6 months is that we will not see any recovery in prices, and we may not see any recovery for another 12 months until after we have reach the peak in unemployment.
Looking further forward becomes more speculative, as previously reported in our blog, some analysts are suggesting it will be at least 2015 before house prices recover to their 2007 peak. But, there is another factor to consider, as the building of new homes has sharply reduced it will take some time for capacity to increase again, it is possible this will contribute to a supply-demand imbalance as the economy starts to recover further in 2011 and 2012, so we could see some house price recovery a little earlier than 2015. Only time will tell.
