Full-blown recession is only threat to house price stability


London Briefing/Chris Johns: What we clearly need is a good recession. One of the most high-profile forecasters of a property market crash has grudgingly conceded that it was wrong.

Capital Economics, led by the otherwise eminently sensible Roger Bootle, has long been one of the most pessimistic of commentators with a forecast 20 per cent fall in house prices for the year about to end.

Something strange might happen between now and the end of the year, but the numbers suggest that prices have risen in 2005 by 2 to 5 per cent.

With only a few days to go, the mea culpa has been issued: the housing market has been stronger than expected because of lower interest rates, property scarcity (not enough new building), strong employment growth and easy availability of mortgages.

We might be tempted to point out, gently, to Capital Economics that all of these factors were utterly foreseeable this time last year. But this is the season of goodwill so we will resist all such urges.

Capital was by no means the only bear of the market and deserves credit for putting its hands up when so many others have not.

The robustness of the property market against a background of a relatively weak economy suggests that the only thing that can knock housing is a full-blown recession.

The last time we had a calendar year in which GDP actually fell was in 1991. Which also marked a nadir for property. It's been a long time since we have had 14 consecutive years of economic growth - Gordon Brown would have us believe that the last time was before the industrial revolution.

He employs more statisticians than I do, so I defer to his superior knowledge. At least he can't claim that Labour was in power back then as well.

On most forecasts for the next few years, recession will be something that only old fogies remember. It will be something that we will try to scare our children with but, like most similar tactics, it will backfire.

By the time the next general election comes along in 2009, there will be a whole generation of voters who will have no memory or first-hand knowledge of what a recession feels like.

By contrast, I spent my university years reading books about the 'stop-go UK economy'.

This is remarkable. A phenomenon that most people of my generation assumed to be as regular as the seasons has simply disappeared. The taming of the UK's business cycle has received less attention than it should.

The chancellor, of course, trumpets 'his' achievement at every opportunity, but few commentators are willing to credit Brown with something that occurred on his watch by coincidences only.

In addition, many people naturally fret that the moment we declare victory over the cycle will mark the onset of the next downturn.

There are many well-rehearsed reasons why things are so benign. That the UK economy could have sailed so easily though an oil shock similar to the ones that derailed us in the 1970s is testament to the fact the something must have changed.

Economies are better managed now - a global point - so external disruption is less than it used to be. The independent Bank of England has also played a large part.

The demise of highly volatile manufacturing industry has been a tragedy for those who lost their jobs. From employing over half the workforce 50 years ago, manufacturing probably now accounts for less than 15 per cent of the working population.

Just as we absorbed the earlier decline of agriculture (into manufacturing) we have how managed another economic transformation while maintaining full employment. But service-based economies are much less prone to ups and downs.

The biggest task facing any government over the next few years will be the ongoing retreat of manufacturing and the almost complete disappearance of unskilled jobs. How we treat the people so displaced will determine the electoral fortunes of many politicians.

In all of this one inescapable fact emerges: compared to even the most recent past, current levels of prosperity are amazing. While it is obviously true that absolute poverty still exists in the UK - and it should not - the focus on measures of relative poverty utterly exaggerate the problem.

We are an astonishingly rich society, rich beyond even the most extravagant dreams of our parents. Happy New Year.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.