High Street fears on house prices

WITH JUST five shopping weekends to Christmas, festive jitters are jangling Britain's army of retailers. What makes this year even more nerveracking than usual is that the most critical trading period is coinciding with the start of a slide in house prices.

A falling property market can be disastrous for the High Street. Rising house prices fuel confidence, encouraging people to borrow and spend, but when they fall consumers tend to hunker down.

The most vivid illustration of this is the housing crash of the early Nineties when rising mortgage payments and plunging property values left 1.6m people mired in negative equity and many others up to their necks in debt.

Between the peak of the housing market in 1989 and its trough in 1993, property prices tumbled 14%, triggering a consumer recession. Having grown 3.5% in 1989, household expenditure dived 1.6% in 1991. It took three more years before it got back to levels seen before the housing crash.

Given that there is widespread disagreement about where the housing market is heading at present, it is not surprising the outlook for the High Street is hazy.

But the Bank of England said in last week's Inflation Report the link between house prices and household spending has loosened so much since 2000 that it has become virtually non-existent.

The Bank offered two explanations for this. First, the easing of credit constraints has made households less dependent on rising collateral in the form of house prices to increase their access to borrowing.

Second, house prices and household spending have previously been driven by changes in expectations of future income.

But in this cycle, house prices have been driven by other factors such as investment demand while income expectations, and thus spending growth, have remained modest.

The Bank's happy conclusion is that, provided income expectations do not turn down sharply, spending growth should ease only moderately despite a sharp slowing in house price inflation.

Merrill Lynch economist Michael Taylor agrees. 'Even if house prices were to fall, consumers should prove resilient,' he says. 'It is only if collateral (house prices) and cash flow (disposable incomes) deteriorate simultaneously that significant changes to consumer spending plans tend to occur. The consumer is in much better shape to withstand weaker house prices than on previous occasions.'

But Jonathan Loynes, chief UK economist at Capital Economics, points to the latter stages of the late-Eighties housing boom when spending became similarly insensitive to property prices. Once the housing market changed direction, however, the correlation quickly re-established itself and spending growth slowed sharply alongside falling house prices.

Loynes says: 'Of course, it is far from certain the same thing would happen again. Nonetheless, the risks to the assumption that households will simply shrug off the impact of falling house prices seem to be clearly in one direction.'

Capital, which predicts house prices will fall by 20%, has pencilled in consumer spending growth of just 1% next year - the weakest since 1992.

The early signs are not good. While the Royal Institution of Chartered Surveyors yesterday said house prices are falling at the sharpest rate since 1992, retailers are warning they face a 'difficult' Christmas.

Whether this proves to be no more than the annual game of cat-and-mouse with bargain-hunting shoppers remains to be seen.

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