Five reasons house prices will plunge further
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Associate Editor
David Stevenson Jun 05, 2009
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"It seems the worst is behind us," says Nicholas Leeming of Propertyfinder.com. "Confidence in the housing market is at its highest since the credit crunch began." Buyer enquiries have risen for six months running, says the Royal Institution of Chartered Surveyors. The Daily Mail warns "gazumping is back", while Harvey Jones on Lovemoney.com is even clearer, claiming "the house-price crash is over".
With Nationwide reporting that May house prices rose by 1.2%, the Halifax claiming a rise of 2.6% for the same month, and the Bank of England confirming that new mortgage approvals (often a good forward indicator) climbed 8% during April to 43,201, their highest level for almost a year, the optimists seem to have a point. But dig below the surface, and the outlook's much less rosy. Here are five reasons why UK house prices are set to slide – maybe a lot – further.
1 They may have ticked higher, but mortgage approvals are still 22% down on April 2008 and 60% below their 'pre-correction' levels, says Seema Shah of Capital Economics. That's "a long way off the 80,000 level that has historically been consistent with stable house prices", let alone values rising again.
2 Home loan conditions are still very tight – two-thirds of all current mortgage offers require a 25% deposit. And they aren't showing any sign of easing up. Gross mortgage lending was down 52% year-on-year in April, while net lending reached its lowest for eight years, says the British Bankers' Association. This week's Bank of England numbers also show 'secured' loans growing by a miniscule 0.1% each month this year. Recent "increased interest was largely confined to cash-rich buyers", says Capital Economics' Roger Bootle – and there aren't enough of them around to sustain a new house-price boom.
3 Many borrowers' mortgage bills have tumbled as the Bank cut interest rates. But this could be coming to an end. Fears that our government may have trouble funding the national debt are causing rising 'swap' rates, on which fixed-rate mortgages are priced. Standard variable rates (SVRs) are rising too. Nationwide has just upped its SVR for new customers to 3.49% over the Bank's base rate. "Any material rise in government funding costs will have a knock-on effect on secured borrowing, putting significant pressure on households," says RBC Capital Markets' John Wraith. "This could have a serious impact on any UK economic recovery."
4 Job losses keep rising. "Unemployment is predicted to soar from its current 7% to over 10%", says George Hay on Breakingviews. That's likely to create a wave of forced selling as the newly unemployed lose their homes. This would hit prices hard (see the chart above for an idea of how unemployment and house prices tend to be inversely correlated).
And another timebomb's ticking, too. Almost a third of British non-conforming mortgages – where borrowers with weak credit scores were given loans on the back of minimal, or no, documentation – taken out in 2005 are now 90 or more days behind on their payments, says David Watts at CreditSights. He calls these "alarming numbers, uglier than expected". It could all add up to another surge in repossessions, and more houses hitting the market when it's least able to absorb them.
5 Finally, affordability. "From 1983 to 2001, the ratio of mortgage advances to earnings remained within a range of two to 2.5 times", says Jon Bell at Shore Capital. "By 2007, it had risen to above four times. This party is now over." The conclusion? "Although affordability has improved, it remains stretched. If real [inflation adjusted] wages fall, affordability may not be restored for the best part of a decade."
The bad news is that incomes are already falling by some measures: UK average weekly earnings fell 3% year-on-year in March. During past downturns in Britain, Japan and the Nordic countries, Bell says, gains made during the bubble periods were entirely lost in real terms. If history repeats itself, "house prices could more than halve from here".
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