What’s the difference between guesswork and forecasting? Consider the following range of recent ‘forecasts’ and tell me, because I’m not sure: ‘A correction of approximately one-third in house prices could be on the cards in the next two or three years’ (MPC member); ‘Price of homes will drop by 10 per cent’ (Lloyds TSB); or:
‘Citi chairman joins bulls by predicting end to meltdown’ (Citigroup); ‘We are on the cusp of an equity meltdown that will slash and shred portfolios like Freddie Krueger’ (Soc Gen).

These are not just differences of opinion. They are fundamental disagreements on the economic outlook which would create huge differences in one’s investing behaviour depending upon who one chooses to believe.

Think about how the housing market may move from here. The mortgage market has all but seized up. Ask any mortgage broker at the moment and they have virtually nothing to offer prospective customers seeking to remortgage other than to stay with their existing lender.

So buyers can’t borrow the money to buy their chosen property. Add to this an over-supply of properties and prices are headed only one way.

Property hangover
Easy lending, cheap rates and rising property prices fuelled the buy-to-let binge. Property portfolios were built by using the equity from one property to put down on the next, and refinancing every couple of years kept the costs of multiple property ownership reasonable, covered by the rental income coming in from eager tenants who could not afford to buy a property of their own.

What happens when the lending, as seen above, dries up? What happens when it is impossible to remortgage to a deal that keeps the monthly payments below the amount you are receiving in rent? What happens when property prices fall instead of rising, leading to ever-decreasing loan to values, even when mortgage deals do begin to re-emerge? What happens when property prices have fallen sufficiently for the tenants to afford a home of their own?

What happens is that the sums won’t add up, landlords will be running at a loss, and they will have no alternative other than to sell up, either by choice or forcibly.

Illiquid assets
The problem with selling a property is that it is a highly illiquid asset. As a seller, you are dependent upon finding a buyer who wants, and is able to afford, your property over all others.

Of course, this is not a forecast, but a guess as to how events may develop.
But if this guess is right, we should not be surprised to see the spiral downwards in house prices exceed the 30 per cent forecast from the MPC member.

Keeping your balance
So what of equity markets? Soc Gen’s apocalyptic forecast of between a 50 and 75 per cent crash echoes the direst predictions of the 1990s, for the consequences of the technology-led crash, never fully realised.

We are in one of those periods where a lot of money can be made or lost depending on the choices that we make. Now is the time to review any investments you own to ensure you have a balance, as to be too exposed to the wrong asset class at this time could be extremely damaging to longer-term returns.