Heading for a hangover

Economist Fred Harrison forecast, with uncanny accuracy, a slowdown in 2008 a decade ago. His view is that a boom in the housing market always leads to a recession, on an 18-year cycle. Harrison, whose parents were licensees, predicts what the future may hold

It's not a phrase with spine-chilling qualities: "drop in discretionary spending". But it is the term that licensees should now be watching for in the press - it will signal the decline in spending by consumers responding to the drop in the value of their homes.

Belt-tightening will cause grief in all sectors of the retail trade as family budgets come under pressure. The turmoil in the financial markets will lead to the lay-offs that are always the price we pay for a housing boom.

Another sign will be the sudden halt to reassurances that the economic downturn will level off in the second half of this year. From Mervyn King, the Governor of the Bank of England, to the head of the Confederation of British Industry, and others, the consensus view being promoted is "a soft landing".

Tough times ahead

Last year, I was repeatedly told that my predictions about the end of the good times

were exaggerated. The economic gurus kept pointing to the low rate of repossession of people's homes, as few families defaulted on their mortgages.

The gurus have gone silent on that objection to my forecast, because the weight of evidence makes it clear: hundreds of thousands of people have been pushed into the danger zone by rising prices.

And they will be squeezed even further as employers tighten the grip on their payrolls, and as cash-starved banks refuse to reduce interest rates on mortgages and credit cards. This means very tough times ahead for the food-and-drinks trade.

Licensees who diversified into offering meals - to lure back customers who left because they could not smoke over their pints - will now discover that fewer people will dine out. For when people fear the prospect of losing their jobs, they retrench on the money they spend on luxuries.

This cut-back began before Christmas, as families economised on the presents they bought to fill Santa's sacks.

Now that pressure will intensify, as the expectation of pocketing capital gains from residential property evaporates.

None of this need have happened. When Gordon Brown entered the Treasury in 1997, as New Labour's Chancellor of the Exchequer, I wrote to him with the news that the growth phase of the business cycle would end in the winter of 2007/8. I repeated that warning in 2005, in my book Boom Bust. And I spelt out the risks linked to the sub-prime mortgage market in America.

No one took any notice. The result is the crashing property market that will now

downgrade the value of real estate in the licensed trade.

I could forecast this outcome because every 18 years, like clockwork, the economy dives back into recession. And the root cause is always the same - inflated prices in the land market. When the bubble pushes prices beyond affordable levels, economic activity just has to stop.

Repeating the pattern

My parents were the managers of pubs in London and the Midlands when I had my first experience with the way the housing market affects liquor sales.

It was in the early 1970s, during what became known as the Barber boom. People went on spending sprees. Then the economy crashed. Fewer regulars came into the saloon to announce "the drinks are on me".

At that time, I did not know that there was a repetitive syndrome to the economy. But as a Fleet Street journalist, I began to investigate the economics of the business cycle.

As a result, in 1983, I published The Power in the Land. I rang the alarm bells. If the patterns of history were repeated, the UK economy would be in deep water in 1992. It gave me no pleasure to be proved correct, because the homes of many families were repossessed when they defaulted on their mortgages.

From then on, I realised that fortunes could be made - or massive losses avoided - if people knew that economic activity would peak in the winter of 2007/8, before tobogganing into mass unemployment in 2010.

But although I tried hard to broadcast that news, the politicians of all parties did not want to know. Nor did the captains of industry. And City financiers were too busy making fat bonuses out of the property market to bother with warnings that Britain was heading for a drunken hangover of epic proportions.

So now the licensees will have a grandstand view of what is about to happen in their neighbourhoods. They will see the spectacle of people losing their homes; others losing their jobs; fewer vacations to exotic locations; and cars won't be exchanged for new models every two years.

Cut-back in spending

The companies that own pubs will also now suffer a massive hangover, because of the properties they bought at the top of the market.

Tenanted pub companies are still buying single-site outlets - right at the peak of the property market. The pub companies will face negative equity on those properties, as values decline by 20% or more over the next two years.

They will come under financial pressure to make up for the losses through the rents they charge their tenants. But as turnover declines, it will be difficult for licensees to maintain the cash flow. Although the cut-back in discretionary spending will affect the whole country, some areas will suffer more than others.

Location, as ever, is the key. Pubs in secondary locations will be hit first. Even so, there are already signs that the Champagne Charlies - the big spenders in the City of London - have cut back on spending in the wine bars.

The Government's plan to levy business rates on vacant properties after the three-month grace period is badly timed for the landlords. Relieved of this charge in the past, they were able to hold out for a leasehold rent in line with the speculative boom in the property market.

Property taxation does need to be reformed - as I told Gordon Brown 10 years ago. If he had listened to me then, a counter-cyclical tax policy could have been put in place that would have kept everyone happy. But he turned a deaf ear, and that's why Britain is now heading for a terrible hangover.

l Boom Bust: House Prices, Banking and the Depression of 2010 is published by Shepheard-Walwyn.