The Tradition "Future HPI" The Year Ahead
The leading index of future UK house prices
Average UK House Price Expected to Fall 24% from £162,848 to £123,764 in 2009
The HBOS Non-Seasonally Adjusted HPI fell £31,410 (16%) during 2008 from
£194,258 to £162,848.
During 2008 the one-year Tradition Future HPI — an estimate of future average UK house prices drawn from the derivative market — fell £60,206 (33%) from £183,970 to £123,764.
The indices further predict that the average UK house price will fall to £109,108 by 2011 - a return to the house prices of Spring 2002.
According to the indices, prices will begin to repair in four years and return to current levels five to six years thereafter.
Tradition Future HPI For 2008
| End-07 | End-08 | Change | |
| HPI NSA | £194,258 | £162,848 | -£31,410 |
| 1 Year | £183,970 | £123,764 | -£60,206 |
| 3 Year | £183,970 | £109,108 | -£74,862 |
| 5 year | £185,948 | £119,693 | -£6,255 |
Commenting, Peter Sceats, Director, real estate division at Tradition, said:
"It is no surprise that the expectations for future house price falls are running ahead of the physical housing market at this time. Despite monthly mortgage payments becoming more affordable and the recent reduction in stamp duty, sentiment in the City for house prices remains undeniably bearish.
Loan to Value rates (LTVs) have fallen from 85%/125% at their peak to around 60%/85% and as a consequence insufficient numbers of first time or re-entry buyers are coming through to breathe life into the crucial lower end of the UK housing market.
Until house prices stabilise, banks are unlikely to increase LTV rates - but house prices will not begin to stabilise until buyers step back into the market. We have a true "Catch 22" situation which, our indices suggest, will manifest itself with average UK house prices falling around 24% from £162,848 to £123,764 in the coming year. "
On residential property derivatives The Financial Times wrote:
"House price derivatives markets are not perfect guides to the real thing. They are often illiquid and dominated by mortgage banks seeking to hedge an element of their housing exposure. But, so far, they have been a better predictive record than most economists"
The above chart compares the HBOS HPI (NSA) with the one year forward Tradition Future HPI. Note how derivative based prices are more volatile than the house price index on which they are based. Note also how house price expectations ran at a premium to real house prices (as reflected by the HBOS HPI) during the up-cycle until September 2007 and since then have run at a discount.
Whether derivative prices, as portrayed by the Tradition Future HPIs, are already a confident leading indicator or merely a noisy errant cousin of the real house price yet to be backed by significant volume, these indices are becoming increasingly difficult to ignore.
