In the wee small hours this morning, the latest housing survey from the Royal Institution of Chartered Surveyors (RICS) was released, this one covering September. What with Halifax earlier this month recording the biggest monthly fall ever in house prices, analysts, commentators and just about everyone else have been wondering, what next? This was rather apt, because the monthly RICS survey is the closest the industry has to a crystal ball. So what did it say?

Before we reveal what the tarot cards, err, sorry, the RICS index, had to say this time, it is worth setting the scene: Last week the Halifax index saw its biggest monthly fall ever, but then again a veritable gaggle of economists told us not to read too much into one month’s worth of data. After all, in the previous week, the latest Nationwide housing survey posted a modest rise for the month.

And now to business: the RICS headline index, calculated by taking the percentage difference between surveyors saying house prices were up and those saying they were down in their region, -fell again. This time the index fell to minus 36; not much of a drop from last month’s reading of minus 32, but even so, it was the lowest score since May last year.

If you are a regular reader, you will know what is coming next. What makes the RICS data so interesting is all the extra bits of information you get when you drill into its report. And in particular, it’s the interaction between new buyers lodging new enquiries with agents, and would-be sellers issuing agents with new instructions.

In the depths of the recession in early 2009, when it seemed house prices could only go down, those who cast their stare deep into the RICS crystal ball found something rather surprising. For it seemed that while both demand and supply were very low, demand, reflected in new enquiries, was rising, and supply reflected in new instructions was falling. Bizarrely, these forward indicators suggested house prices were due to rise, even while no one at that point was predicting an imminent end to recession. And sure enough, a few months later, house prices did indeed rise. The crystal ball had got it right.

But, for 2010 it’s been the other way round and the index tracking new instructions has exceeded the index tracking new enquiries every month this year. September was no exception. The new instructions index rose from 12 in August to 22 in September, while the new enquiries index also improved, but remained negative, jumping from minus 17 to minus 2.

RICS sees some comfort, for those hoping  the market can roar back into life, from the fact that the gap between the two indices reduced this month, as indeed it did the month before.

But for all RICS’ brave attempt to put a positive gloss on things, the fact is, according to its index, in September more surveyors saw instructions rise rather than fall, while more saw new enquiries fall rather than rise.

And for that matter, the price expectations net balance, which is a measure of what surveyors expect to happen next month, dropped from minus 38 to minus 41.

But this time, the oracle at RICS is not unique in suggesting house price falls to come.

Data from the Bank of England out a few weeks ago revealed that mortgage approvals are still in the doldrums.

And recently the FSA said it wants to tighten up on lending criteria, moving the Council of Mortgage Lenders to suggest that had those criteria been applied five years ago, then mortgage approvals since would have been half the level that they actually were.

So, moving forward, this suggests mortgages will be about as common as popular investment bankers.

But the real clincher is this. In the year to July, average earnings including bonuses rose by 1.5 per cent, less than half the rate of inflation. Next year, the hike in VAT will surely mean average wage increases will continue to lag behind inflation. And what with fewer of us enjoying child benefit, it seems that next year will see our earnings stretched even further.

You don’t need a crystal ball to conclude that house prices will surely head south in 2011.
But for us there is another issue in determining UK house prices, an issue far more important than demand and supply. In the UK, the view that in the long run house prices only go up is so entrenched that it takes very little to create a new surge in house prices. This psychological factor is the real reason why house prices rose in the midst of recession, and why they boomed so uncontrollably during the noughties.

But should this view change, then the impact on house prices will be enormous. This is what happened in Japan 20 years ago, and the UK remains vulnerable to such a shock.

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