Second dip in British house values just around the corner

It doesn't take much to get the British excited about house prices again. As the European autumn approaches, there are signs that the market is bottoming out. It may even be rising again.

Does that mean the slump is over? Not at all. Expect a double dip in home values.

True, there are grounds for optimism. The Bank of England is printing money furiously and the economy isn't contracting the way it was at the start of the year.

Against that, any increase in interest rates will hit the market hard, the banks are intent on restoring their balance sheets at the expense of mortgage holders and the British economy is losing jobs. All that means house prices have further to fall.

Right now, there are clear signs of recovery. Nationwide Building Society said house prices in August increased 1.6 per cent - the fourth consecutive monthly gain and the biggest since 2006.

In London, luxury-home values have been rising for five months, said real estate agency Knight Frank. Since London often leads the market, such a development is a positive sign.

There may be more positive signals down the track. The Bank of England said last week mortgage approvals rose to their highest level in 15 months in July. If there is more money being loaned, that can only strengthen the market further.

So it looks like the collapse in confidence in the housing market is over. It's safe to buy a house again, right?

Not quite. There are good reasons to expect a second dip in the market later this year or early next year.

First, the benchmark interest rate is at record lows of just 0.5 per cent. Most people can still manage to pay the interest on their mortgages but at some point, interest rates will rise again.

Once they do, many people will be in trouble. We can expect to see a lot more repossessions. And many of those properties will be at bargain prices, pushing prices down again.

Second, banks are repairing their balance sheets at the expense of mortgage holders. The spread between what the banks pay depositors and what lenders charge for loans is widening. That may be good news for banks and their shareholders. But it is bad news for mortgage borrowers.

Third, a lot of lending has been taken out of the market and isn't coming back. According to CreditSights, almost £300 billion ($709 billion) of British mortgage debt was securitised and sold to the bond markets from 2005 to 2007.

But the world isn't exactly clamouring for British securitised mortgages anymore and won't be for a long time. With less money coming into the market, there won't be the same kind of demand for houses.

Fourth, the British are attacking the financial-services industry, even though it is the biggest branch of the economy.

The chairman of Britain's Financial Services Authority, Adair Turner, even proposed a tax on financial transactions to limit the size of the industry. He described parts of banking as "socially useless."

With that sort of attitude, it won't be surprising if foreign bankers go elsewhere, withdrawing their support from the housing market.

Finally, the British economy is set for a decade of slow growth. Unemployment rose to the highest level in 14 years in the second quarter.

Monetary expansion and Government spending are tempering the decline somewhat, but the fiscal stimulus will end soon and the big tax increases needed to bring the deficit under control will keep demand subdued for years.

Don't be fooled by the slight recovery in house prices. Markets always stabilise for a period but it is just a pause for breath - and the second dip in the crash is just around the corner.

- BLOOMBERG