House prices: Where next? A new crash or a new boom?
Wednesday, 07 October 2009 10:28
While we may not have had a barbeque summer, the last few months has seen a sunnier outlook on the economy, with a resurgent stock market and a rise in house prices.
Some commentators have warned the housing recovery will be short-lived, with the market cooling along with the weather, as the difficult credit conditions and still growing unemployment dampen the enthusiasm brought on by lower interest rates.
On the other hand, two of the biggest homebuilders - Barratt and Redrow - have placed their bets on the direction of the market with a plan to raise £870 million for expansion. And it is impossible to deny - house prices have been creeping up all summer.
Sarah Routledge reads the temperature of the housing market.
House price surveys
There are several house price surveys about, but the Land Registry is the most comprehensive. It does tend to lag behind the other surveys, however.
In August, the data showed a slight drop in house prices of 0.1 per cent, after several months of rises. Analysts point to a natural summer lull as househunters take a break to become sunseekers, before returning to the market in autumn.
It brings the annual decline down to -9.4 per cent, from what now looks like the lowest point of the housing crash of -16 per cent, during February this year.
Property transactions, another important barometer for the housing market, show 41,911 sales per month in the months March to June 2009. In the same period a year earlier, the average was higher, at 60,997 sales per month.
When transactions hit 35,000 at the start of the year, it was consider to show only those who had to move were doing so.
This is a significant drop and suggests the recent rises are not going to be sustainable.
Nationwide, which is the first to report house prices, found prices rose 0.9 per cent in September - the fifth consecutive rise. The rise brings the annual change down to zero, the first time since March 2008 that the year-on-year rate of change has not been negative.
It is a smaller rise than August's 1.4 per cent jump, however, and the market is still down 13.5 per cent from its October 2007 peak.
In September, Rightmove found house prices are up by 0.6 per cent. Rightmove reports asking prices rather than selling prices, so this figure does not necessarily reflect the ultimate selling price - but it does show that sellers' expectations have been raised this summer and they have not fallen at the start of autumn.
But the group says this rise is fuelled by dwindling stock levels, with ten properties coming off the market for every eight coming on.
Which means we should be prepared for a 'double dip' scenario - as more houses come onto the market to meet demand, prices will drop again demand increases further.
In other words, the recent housing market surveys give a mixed view, with five months of rises giving some cause for optimism while others see trouble ahead.
Ray Boulger, senior technical manager for mortgage adviser John Charcol, says: "I expect the recovery in house prices to continue until at least the end of next year. The longer prices keep rising the more confidence returns to the housing market, causing people in a position to buy who were holding off for lower prices to decide to buy.
"The problems of increasing levels of redundancy and lack of mortgage finance, especially for high LTV mortgages, are cited by housing market bears as reasons why prices will fall back, but I haven't heard any of them explain why prices have still risen this year despite both these negative factors being true for the whole of the year."
Mr Boulger also believes the double dip scenario is unlikely because there is little chance of an oversupply of stock anytime soon.
"As prices rise some people will decide to sell but I expect housing transactions to remain low for quite some time for the simple reason that about 35 per cent (3.5 million) of households with a residential mortgage would not currently qualify for a new mortgage and hence have little choice but to stay put, unless perhaps they are prepared to sell up and rent."
Mortgage approvals
According to the Bank of England, a total of 52,317 mortgages were approved for house purchases in August, down from 52,404 in July. It isn't a huge drop, but it comes after several months of rises.
Separate figures from the Building Societies' Association (BSA) showed consumers repaid £655 million more than they borrowed in August.
So the fall in mortgage borrowing is partly due to a lack of demand - consumers are keen to pay off their debts before borrowing more - but the lack of approvals is also down to tighter conditions set by the lenders.
Mortgage approval numbers are closely connected to house prices, so the fall signals further house price drops ahead.
Construction
A healthy supply of houses to meet or exceed demand will support a stable market. But the credit crunch hit the construction industry hard and many housebuilding projects collapsed, or were put on hold. So where are we now?
According to the National House-Building Council (NHBC), things are looking up.
For the sixth quarter in a row, applications to build new homes in the UK have been rising.
During the three months June to the end of August 2009, NHBC received 24,246 applications to build new homes in the UK, an increase of 2.5 per cent on the previous rolling quarter (23,661).
This varies drastically across the UK. Merseyside has seen a 32 per cent fall in applications, while applications in Greater London are off by 29 per cent.
Imtiaz Farookhi, NHBC chief executive, says: "The sector is undergoing a period of consolidation after a very challenging year.
"The autumn is a significant time, as we will be able to take a view of the market in light of improving economic indicators and the resulting effect on the sector's confidence."
Historical comparisons
Looking at house prices over the last year or so, a trend emerges of an accelerating fall, which reaches its nadir in February before easing and gradually starting to rise again.
From this point of view, it would seem the worst of the falls are over and we can get back to normal rises.
But taking a long view shows a completely different picture.
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This graph, courtesy of Nationwide, shows the house price busts and booms over the last 30 years, adjusted for inflation.
The red line shows what would happen if prices rose in a nice even way, while the blue line demonstrates what actually happens. After a peak, the market tends to bottom out below the mean, before plateauing for a while and eventually turning back to growth.
If the current situation follows the pattern of previous crashes, the market has some way to fall.
In fact, if it is anything like the 1990s crash, the average house price will have to fall to around £100,000 from the current £161,816 before a sustained recovery.
On another measure, if the market were to fall back to the long-term earnings-to-house-price ratio - found by dividing the average house price by the average salary - of 3.5, house prices will have to drop further, to around £87,000.
But let's not get too carried away with comparisons to previous crashes. In the 1990s, interest rates were sky high and it was the many forced sales that led to the sharp price drops. The near-zero interest rate environment of today has helped many people to stay in their home and weather the crisis, despite high unemployment.
Economist Howard Archer, from Global Insight, says a house price recovery will come, but don't expect one soon.
"Any sustained rise in house prices will mean that affordability pressures will move back up at a time when still pronounced economic weakness, high and rising unemployment and low wage growth is negative for the housing market. Meanwhile, it continues to be very difficult for many people to get mortgages - especially first time buyers - and this situation seems likely to continue to improve only gradually.
"Furthermore, any significant pick up in the amount of properties coming on to the market due to recently firmer prices would actually be liable to hold down prices further out.
"Consequently, despite further likely gains in the very near term, we suspect that house prices will be prone to relapses and will be essentially flat overall between now and the end of 2010."
The negative factors affecting the property market - rising unemployment and restrictions on credit being the important ones - are going to be around into 2010 and the property market will not recover without an improvement in the underlying economy.
So house price indices are likely to move back into negative territory as we head into winter and the summer mini-boom fades.
But provided the Bank of England can maintain a low interest rate, the sharpest of the falls are probably behind us.
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