Many of the Western world's economies are now being seen through the prism of public spending cuts.

We are familiar enough with those but their effect on the private sector is now becoming known. The computer and IT consultancy Logica, for example, derives over 60 per cent of its income in Britain from government work – hence its publicly-expressed concern about proposed UK spending cuts and its equally open admission that it is now switching its pitches for new business in Britain to the private sector.

Likewise FirstGroup, the biggest student transport operator in the US, is warning that its American and Canadian activities – it runs 60,000 yellow school buses in the two countries – is being badly hit by spending cuts there, too. Property is no different and now, for the first time, I have exclusive data that shows how public spending cuts may hit even the top-end residential sector in the UK.

The country's new coalition government has already announced £6.2 billion (Dh33.73bn) of spending cuts. The Chartered Institute of Personnel and Development predicts 50,000 public sector job losses in the next nine months to meet the government's first phase of these cuts, while Manchester Business School puts the figure at 100,000.

But the coalition government's major announcement – expected on June 22 – will outline how it will begin to tackle the huge deficit, forecast to hit £163bn this year. This will involve far, far larger risks to employment.

Most public sector workers in the UK are relatively low-paid or, in the case of middle management, have roughly average earnings for the country. But the size of the UK's public sector is so large that inevitably many tens of thousands of its senior staff are enjoying very high pay – meaning all sectors of the housing market will take a hit.

"Redundancies from government departments in northern [UK] towns will increase the supply of homes to the market, as those who relocated north [to fill public sector posts] move back south for private sector jobs. With demand still at 50 per cent below peak levels this will impact prices in these areas", warns David Adams of Chesterton Humberts estate agency.

Now Savills, the estate agency whose research team has been strikingly accurate on house price changes over the past three years, has recalibrated its forecast for the mainstream housing market for the rest of 2010. Instead of small rises it now predicts falls – from 2.8 per cent to 4.1 per cent in southern England and London, about five per cent in the Midlands and as much as seven per cent in parts of northern England. The impact of imminent spending cuts is not going to be felt only in the 'average priced' housing sector normally associated with public sector employees. Savills has also produced data showing that of the homes it sells – typically costing £250,000 to over £4m, so very much 'top end' – some 15 per cent are bought by public sector staff. In some price sectors in different UK regions, the totals are much higher.

"The relatively high pay of these public sector buyers over the years, when compared with other jobs in the local area, has meant they've been able to purchase larger homes," said Savills' researcher Marcus Dixon. This has then "allowed them to be in the market to buy properties with considerable equity later in their career," he says.

This provides, for the first time, evidence that even the elite end of the UK housing market may be in for a volatile period while the country's spending cuts take effect in the next three years. And remember, this data only identifies buyers directly employed in the public sector – not private sector staff relying on public contracts.

For overseas buyers, this probably represents an opportunity; the continuing poor performance of Sterling against the dollar, the euro and other currencies means UK property is very cheap right now. But it also demonstrates that for the domestic British residential business, prospects are muted until 2012 or perhaps beyond.

What applies in the UK almost certainly applies in other countries with similarly large public sectors. We may need to take the public spending cuts medicine, but for the residential sector it is not going to taste good.

 

- The writer is Property Correspondent of The Observer. The views expressed are his own