Mark Dampier: Why the smile? This is all his fault

The Analyst

(David Rose, The Independent)

Over the course of the past few weeks, I have been criticised by friends for my pessimistic views on the UK economy, and on house prices in particular. I don't see what good it does to shoot the messenger, but I note that throughout history messengers have often received the raw end of the deal! I also find it increasingly difficult to be politically neutral; investment and politics are now more closely linked than ever.

I firmly believe that this government has systematically wrecked our economy over the past 10 years. They sold half our gold reserves at about $250 (£164) an ounce, and now the price is more than $850. They have taxed pensions, they raised taxes through complicated means so as to hide them, and they weakened regulation of the banking system.

Fatally, they not only spent the surplus money we had in the good times, but also borrowed more! They have used some of this money to expand our bloated public sector instead of introducing the dramatic cuts and reform it needed. The opposition parties haven't been much better, though, seemingly too scared to say anything that might offend the public sector or indeed anyone else. They've had an open goal wider than the Grand Canyon and completely failed to score.

Consequently, we go into 2009 with the economy in a huge mess and politicians of all parties blaming everyone except the people who are really responsible – themselves. Is it any wonder that I'm angry? I am sure that most of you are, too.

The underlying cause of the housing problems was an unchecked rise in land values. Indeed, as I have said in this column before, the only person to have foreseen this, to my knowledge, was Fred Harrison in Boom Bust (written in 2005). House prices in America are likely to fall another 15 per cent before they reach the bottom, making for a fall of at least 40 per cent in total. I mention this because our housing market was even more overvalued than theirs. So far, our housing market has fallen about 16 per cent, so there is a long way left to go, especially considering an almost-guaranteed sharp rise in unemployment this year. Anyone predicting a modest recovery later in 2009 is fooling themselves.

The best leading indicator of house prices is mortgage approvals, which makes sense as the vast majority of people can't buy a house unless they are first granted a mortgage. The graph on the right, which pushes the mortgage approval data forward seven months, reinforces my point (thanks to M&G for this data).

I believe we can expect at least a 20 per cent fall this year, and the market isn't likely to hit bottom until late 2010 at the earliest. Worse still, millions of people will be in negative equity, which will cause a big drag on the economy.

What solutions do our politicians have for our flagging economy? Labour want us to spend more in the shops, but a VAT cut that reduces prices by 2.13 per cent is far too small, especially as shops are slashing prices anyway, and we know that huge tax rises will come within two years.

The Tories' master plan is a tax break on savings (although not for everybody), but perhaps the irony is lost on them that if everyone now starts saving, the recession will be even worse! God save us from the politicians. As Ronald Reagan once famously said, the nine most terrifying words in the English language are: "I'm from the government and I'm here to help."

What we really need is a thorough overhaul of the tax and benefits systems, along with a huge cutting back of the public sector – but that would take some real hard work and great political courage, and might be difficult to sell to the public. Consequently, I expect to remain angry and disenfranchised for quite some time to come.

Next week, I will return to funds that I hope might prosper over the next few years (despite the politicians).

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent