Like most people, I follow the incredible story of UK house prices and their stratospheric ascent in recent years. As I have pointed out before, the chart since WWII shows a lovely five wave pattern
Isn’t that pretty? We are in the final fifth wave and when it tops – which should be very soon – the first A wave of an A-B-C decline will be something to behold. My first target is the wave 4 low at around the £150k area.
Of course, we all know the background to the current situation – many years of zero interest rates and highly restricted supply while high immigration served to swell the demand, plus the perpetual house-owning imperative for UK families.
And for a very long time, there have been constant demands on house builders to get to work pronto – but to no avail; there just hasn’t been enough new houses coming on stream to satisfy demand at a price first timers can afford without lumbering themselves with huge mortgage repayments-to-salary ratios.
But with immigration numbers now coming down (and population growth leveling off) and higher interest rates starting to bite (see my LIBOR chart last time), have we reached the top in prices? That would be totally consistent if for some reason, builders got the lead out and build like crazy (as they fear, like me, the top is nigh and if they delayed, they would be selling into a falling market which is what they fear the most).
They have been rationing supply so as to be always selling into a rising market, but are we at a tipping point?
As ever, the stock market is the best source for clues that can answer questions like this. Here is Barratts, one of the UK’s biggest mass-production house builders that would be expected to benefit from a sharp increase in house supply at current prices:
The Elliott waves are pretty clear to me – we are in wave 3 of a very large C wave down coming off the B wave high at 700 in October. At the current quote of 634, shares have lost almost 10%. Is that a vote of confidence that current house prices can be maintained so as to keep their profits growing? I think not.
So perhaps this chart is telling us that the unthinkable is about to happen – house prices are on their way down off the wave 5 high.
Of course, this is entirely consistent with my thesis that assets of all stripes are likewise headed into major bear markets.
Anyone buying a home today will be paying almost four times what it cost 30 years ago. Do you believe that same home will be ‘worth’ four times as much as today 30 years hence at the end of their mortgage term? That would put it at almost £900k. And a person buying that home then would have monthly repayments of £2,500 pm even if the interest rate was flat zero pc!!
And if the housing cost to-income ratio was 25%, their income must be £120,000 pa to support repayments.
But of course, that is fantasy – with a 3% mortgage rate, their monthly repayments would be more like £3,500 pm and their income a minimum of £168,000 pa. And that is the average UK income (it is around £28k today). To reach these income levels, productivity would need to multiply six-fold. Fat chance!
Of course, with everyone having got inured to constantly rising prices, very few are prepared for when they fall, especially the vendors of ‘used’ homes. They will hang out for what it was ‘worth’ at the peak. And the market will grind to a halt as buyers walk away. This happened in the mid-2000s as the Credit Crunch was hitting prior to the 25% price decline.
The odds are stacking up that house prices will be lower a year from now.
Stocks are in relief rallies
I usually show my analysis of the Dow, but most UK traders will want to know the outlook for the FTSE, which I only cover here occasionally. So here goes.
Here is the daily chart showing the trendless action last year into the 7800 top on 15 January and the impulsive crash to the 6900 low on 6 February – a rapid loss of 12%:
The standout feature is the major trendline joining the three major lows last year, the break last month and the normal rally to kiss it. We are now in a Scalded Cat Bounce down (see my text, pp 83 – 84, 143). That line is now acting as resistance.
Here is a close-up
The kiss was wave C high of a normal A-B-C counter-trend bounce and today, a relief rally has carried to the Fib 50% level at 7200. This is very strong resistance and is wave 2 of what should be a five down to come.
It is trading there as I write and it would take a huge push to get it above this level, although the 62% level at 7230 is possible. It may not make it before re-entering the bear market. At least, I have a good low risk trade here.
Silver appears poised for major rally phase
I have been bearish gold/silver off the 16 February highs and saw the market decline to the 1 March low, But then I spotted a possible bullish gold setup. I covered that in my last blogpost, but here is an equally promising setup in silver
I have a five up on a strong momentum divergence (heralding a sharp reversal, which arrived). Then an A-B-C three down also on a strong momentum divergence. It met the Fibonacci 78% support at 1620 and reversed sharply.
Now the market is pushing above the blue trendlline in a bullish show if strength. I need to see a move above the B wave high at 1700 to give me confidence in my forecast, but with gold up $12 today, it is looking pretty good.
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