When does a fall become a crash?

Thursday, 28 August 2008 12:00 AM

The torrent of negative news for the UK property market continued unabated today, leading analysts to question - is this now a house price crash?

What's the evidence?

Figures from the Nationwide released today illustrate the scale of the problem now facing the market.

Average property prices have fallen across the UK by 10.5 per cent over the course of the last year, and what's more the pace of decline is accelerating. While prices fell by an already dramatic 1.5 per cent in July, this accelerated to 1.9 per cent in August, with activity "very subdued", according to Nationwide.

This is tenth consecutive monthly fall recorded by the building society, and the first time the rate of decline has reached double figures since 1990.

Furthermore, a host of other indicators all point to a similar slowdown.

The Halifax house price index finds prices are down 8.8 per cent for example, while Rightmove.co.uk research shows asking prices in England and Wales are now heading south for the first time - down 4.8 per cent - since the credit crunch began.

"This rapid re-adjustment during the last three months comes as some discretionary sellers choose not to enter the market, leaving a higher proportion of forced sellers who price more aggressively," explains Miles Shipside, commercial director for Rightmove.

However, these short-term falls must be viewed in perspective. Even by the Nationwide standard, house prices have only returned to the level last seen in 2006.

Property prices have increased by around 170 per cent over the last decade - a rate now proved unsustainable. The IMF regards property prices in the UK as overvalued by 30 per cent.

As such recent falls remain relatively modest.

The real cause of concern is transaction levels. The National Association of Estate Agents (NAEA) reports each agent is now selling just six properties a month, down from 12 during the same period last year.

"The figures reported by agents in July show that there is still an indication of stability in the market, however consumers continue to adopt a 'wait and see' approach in the hope that there will be an improvement in the market," explained Chris Brown, president of the NAEA.

The latest figures from the Council of Mortgage Lenders (CML) also show gross mortgage lending is some 27 per cent below the figure recorded in July 2007.

Finally, Datamonitor argues lending is likely to remain subdued well into 2009.

So what is behind the falls?

All of these indicators seem to point to a crisis. Houses were overpriced, with lenders making unsustainable loans. When the first cracks began to appear following the Northern Rock crisis and credit crunch, the easy loans dried up, sending demand, and subsequently prices, spiralling downward.

So what else is having an impact on the market? A whole host of factors.

Affordability remains stretched for both home-movers and first-time buyers, stretching budgets. This has also been exacerbated by a fall in real incomes.

While wage growth for the second quarter of this year stood at 3.3 per cent, according to Office for National Statistics [ONS] figures, the inflation has reached 4.4 per cent according to the consumer price index (CPI).

This has squeezed incomes at a time when unemployment is beginning to rise, creating a generally unfavourable climate. At a time when lending is being curtailed, many buyers are simply choosing to just walk away from the market.

The government has also played a roll, announcing, and subsequently denying, a potential stamp duty holiday for potential buyers during the current turbulent market.

Industry insiders have attacked this move, suggesting the uncertainty created has caused buyers to shy away from potential purchasers. Indeed, some 56 per cent of estate agents claim to have lost a sale as a result.

While the Treasury has tried to end speculation, calling it "plain wrong", other parties have remained sceptical.

"The government's public dithering over whether to offer a stamp duty holiday is making a bad problem worse," commented Conservative shadow chancellor, George Osborne.

He was joined by Vince Cable of the Liberal Democrats, who added: "Not only is a stamp duty holiday a ridiculous policy, amounting to little more than a bribe to push first-time buyers into a falling market, but the uncertainty created is causing the already slowing housing market to grind to a complete halt."

The Bank of England has also been unable to react. With prices falling so dramatically, the Bank would expect to cut interest rates in order to stimulate demand.

However, with the CPI presently running at 4.4 per cent - well ahead of the two per cent target - there has even been talk of raising the base rate from some members of the monetary policy committee (MPC) in order to curtail spending.

The housing market is also having an impact on the wider economy.

"This has been a summer that many retailers would rather forget, explained Andy Clarke, CBI Distributive Trades Panel chairman and Asda retail director.

"The downturn in the housing market is continuing to depress sales for those shops selling big-ticket items."

Any signs of hope?

Buried in the Nationwide date today was a revelation that the number of buyers in the market was increasing, pointing in the right direction.

Furthermore, the cost of a mortgage has continued to decrease in recent weeks with a host of lenders cutting rates and taking the average cost of a fixed-rate mortgage to pre-crunch levels.

Figures from the CML also show while repossessions are increasing, they are still well below the levels recorded in the early 1990s - when 75,000 homes annually were taken by banks.

A lack of distressed sales is also supporting prices, as those who do not need to sell simply sit tight, and do not offer property under duress at knockdown prices.

So what next?

While it appears the market has some way to run before returning to an even keel, it is a virtual inevitability it will do.

A shortage of housing in the UK - as evidenced by the government's plan to build three million new homes by 2020 - will support prices once they return to a sustainable level.

Furthermore, only those who bought in the last two years, at the peak of the boom, are likely to slip into negative equity. And of these many will see a return on their investment if they sit tight and wait for a return to a positive market.

Prices are also historically high, and a correction of the extent seen to date will only return property to a more realistic level.

As such, should unemployment remain low and inflation recede, allowing the Bank of England to cut interest rates, the present turbulence will be viewed as a healthy correction - allowing first-time buyers to return to the market - rather than a devastating crash.

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• house prices
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• uk property feature