Icebergs don't give you soft landings

With the good ship housing market having apparently hit an iceberg, there are nonetheless still people out there who still think that a 'soft landing' might be possible.

By 'soft landing' they mean some period of stagnation of house prices, presumably followed by the resumption of crazy levels of inflation like we've seen over the past 10 years.

This is pie in the sky. It's of the very nature of these things that there can be no soft landing, that house prices will fall, reposessions will soar, and unemployment will increase, before things eventually bottom out in a few years' time.

Why?

In short, because it's an inherently unstable market, where investors expectations of price changes become self-fulfiliing. Sellers who expect price falls will try and sell as soon as possible, but they will find that buyers are waiting for those price falls to materialise. And if sellers refuse to drop prices, they will simply pull the rug out from underneath the sellers of the house they were going to buy. And so on.

The very factors that led to the boom in the first place are going into reverse and there's little that anyone can do to stop it. Where before we had irrational exuberance, we will now have a period of mounting fear and panic, before reality eventually sets in again.

To summarise, we have: rising borrowing costs, less mortgage availability, weak income growth, and increasing expectations of price falls. That's a crash in the making.

Interestingly Spreadfair now projects that house prices will fall by 7-8% (in nominal terms) by end 2008. I'd probably sell that if I wanted to hedge against falls. But not owning any property, I'm hedged up to my eyeballs anyway.