The Big Question: Is the housing crash finally over, and is the market now recovering?

Author: By Sean O’Grady, Economics Editor

Why are we asking this now?

Yesterday David Miles ? author of a Government-commissioned report on the
mortgage market in 2004 and a new member of the Bank of England’s Monetary
Policy Committee ? said that “expectations are crucial in the
housing market and they look a bit better now than a few months ago … My
hunch ? and I put it no stronger than that ? is that we have seen most of
the overall aggregate house price falls.” The Bank, meanwhile, said
that the availability of mortgage credit was expected to rise over the next
few months. Earlier this week the Nationwide Building Society’s house price
index registered a 0.9 per cent rise in prices during May ? three out of the
last four months’ figures have shown an increase; the Halifax and other
indices agree. The House of Commons Public Accounts Committee also
recommended yesterday that the planning process be speeded up to allow
enough homes to be built to meet demand.

Are house prices now stabilising?

Yes ? though that doesn’t mean they will stay that way for ever. The most
compelling data is probably that published by the Land Registry, which is
comprehensive. According to that source, house prices fell by 0.2 per cent
in May, the same decline as the month before, and that was the smallest drop
since February last year. Property values are now 15.9 per cent lower than
in May 2008, a gentler fall than the 16.5 per cent annual fall seen in
February, and 17.4 per cent below the peak prices of January 2008.

So what?

So what indeed. In the housing slump of the early 1990s there were 17 months
when house prices rose, even though the overall trend was firmly downward ?
a downwards staircase pattern rather than a ski slope. Most graphs in
economics exhibit a certain amount of volatility or “noise”. So
economists, as you might expect, disagree on whether what we are seeing now
is really the start of a trend. It could be that prices will stabilise and
not rise for a very long time, or they could drift down for another couple
of years.

In the case of the last crash, real terms values did not revert to their 1989
peak until 2001. Even the most upbeat of those watching the market expect
prices to finish this year lower than they started. Overall, the rough
consensus view among economists is for another 10 per cent fall from current

So, is the house price recovery likely to continue?

Some say the current revival in house prices is simply a function of special
factors, such as the release of pent-up demand from cash buyers or those
with very large deposits. They have been waiting for signals that the market
may have bottomed out and are now taking advantage. However, by their
nature, these sorts of buyers are neither very large in number nor a
sustainable source of strength for the market. The other factor appears to
be shortage of stock in what has become a very thin market, which also tends
to make “price discovery” more tricky. In the boom, most people
knew what the house down the road or the flat below theirs went for; now
buyers and sellers are less certain as to what to compare their homes with.
Some householders are also reluctant to put their place on the market if
they think they will make a loss on it.

Where do we go from here?

The fundamentals in the housing market remain weak for several reasons. One is
the number of mortgage approvals for first-time buyers. This is the main
source of new money coming into the market and drives prices. Since the
onset of the credit crunch and the disappearance of many foreign lenders and
mortgage brokers, the availability of finance at high loan to value ratios
has disappeared. Analysts at Cazenove say that the main factor that
traditionally drives the British property market is the availability of 90
or 95 per cent plus mortgages ? of the kind no longer offered. That,
apparently, is more important even than very low interest rates or rising
incomes in driving demand. Until the banks and building societies return to
those sorts of deals ? unlikely when they would virtually guarantee negative
equity for the borrower in a few months’ time ? the market will not stage a
strong recovery.

This accounts for the collapse in mortgage approvals. At the rate they were
falling last summer and autumn, the British first-time buyer would have
become an extinct species by Christmas. Since then the number of mortgages
granted has picked up, but is still abnormally low ? 55 per cent below its
long-run average and 33 per cent below the trough reached in the 1990s
downturn. The Bank of England’s own figures suggest that they are stuck at
about 43,000 per month ? not nearly enough to push prices up over the long

What about where I live?

Northern Ireland is experiencing the worst declines ? prices have fallen by 26
per cent compared with this time last year. Wales, on the other hand, is
showing the most marked rises ? up 7.7 per cent on the beginning of the
year. Following five consecutive quarter-on-quarter declines, house prices
in Greater London rose by 4.8 per cent in the second quarter of 2009, and by
more in prime locations. East Anglia is up by 5.2 per cent over the same

Most regions in northern England saw prices fall slightly compared to the
previous quarter, although Yorkshire and Humberside and the East Midlands
both recorded increases. Scotland is reportedly fairly flat, having held up
better than the rest of the nation in the early part of the slump.

Why are falling house prices so bad?

They aren’t, for first-time buyers; and they are enjoying the “gloomy”
headlines ? though they know better than most that houses remain
unaffordable when compared to incomes. For homeowners, falling prices have
pushed many ? about 1 in 10 ? into negative equity, destroying their wealth.
As long as they have a job and can afford to service the home loan that’s
only a paper loss; but the rising trend of unemployment and repossessions
will turn that into the loss of a home.

What is likely to happen next?

As usual there will be many countervailing forces at work. On the optimistic
side (for homeowners) is the huge amount of cash being pumped into the
economy by the Bank of England (about £100bn so far) and extremely low
interest rates. There are encouraging signs that the economy is probably
over its worst decline, although it may still relapse ? the so-called double
dip recession. Estate agents are seeing more enquiries.

And in the long term?

Long term, housing remains an attractive, tax-efficient investment for most
people, and demographics and a shortage of land ought to keep real increases
on an upward trend. On the other hand, unemployment is rising, interest
rates will probably go up next year, most people are desperately trying to
pay off debt rather than take more on. The banks are far from fixed, and the
Government will have to repair our catastrophic public finances, which will
squeeze the rest of us when taxes have to go up, starting with VAT in the
new year.

Is Britain’s housing market settling down?


* Following the cutting of credit access, mortgage approvals are now expected
to rise

* An Englishman’s home is his castle ? and home ownership remains extremely
popular in the UK

* Though some are not convinced, house prices are showing signs of stability


* There remain few high loan-to-value mortgages which are vital for first-time

* House prices are still far beyond what many first-time buyers can afford and
so a vital part of the market’s mechanism remains damaged

* Higher rates of unemployment and bankruptcies will choke off a revival

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