A dramatic graph showing how much house prices in UK are falling.
Despite a radical cut in interest rates to 3%, house prices are likely to keep falling in 2009.
Why are House prices falling so much
Economic recession - rising unemployment increases number of home defaults. - People don’t want to buy with so much economic certainty
The snowball effect - No one wants to buy when house prices are dropping so much. It makes sense to wait and ride out the storm
The Credit Crunch - Banks are trying desperately to improve their balance sheets. They don’t want to lend mortages. Furthermore, with falling house prices, there is the danger of negative equity. Therefore, banks are wanting a big deposit.
UK house prices continue to fall. In the month of August house values fell by nearly £5,000 to £164,654.
The decline in house prices is linked to the shortage of credit in the mortgage markets, but, also reflects a fundamental long term misalignment of house value. House prices have risen faster than earnings as people have struggled to get on the property market.
House values depend upon.
Location. regional variations in house prices are significant even in a city
Supply compared to number of households. This is a problem for the UK, demographics have been increasing the number of households faster than the supply.
Economy. In a recession, demand for buying a house drops off as people look to rent. Unemployment also increases the number of repossessions leading to lower prices
Affordability. In long term, house values need to be affordable. A traditional lending requirement was 3 times income. though this has often been stretched.
Mortgage availability. The lack of mortgages in 2008 caused prices to fall.
There are various measures of tracking house prices in the UK. There are several different house price surveys that give different perspectives on the state of the housing Market. It can become a little confusing because almost every week, there will be 2 or 3 different surveys, giving a different figure for average house prices.
Royal Institution of Chartered Surveyors RICS. This is a survey of market confidence. They ask surveyors and estate agents about whether they expect prices to rise or fall in the future. Although this is less scientific it can give a useful guide to future trends.
Data from the Nationwide suggest that house prices are falling at their fastest rate since 1991. Average house prices have dropped from their peak in July 2007 and look set to fall further.
The main reasons behind the housing slump include;
Freezing up of mortgage sector. Banks saddled with bad detbs are unwilling to lend to first time buyers.
Fears over negative equity. Falling house prices mean banks are unwilling to lend mortgages without big deposit. Consumers are unwilling to buy with prospective of falling price.
Overvalued house prices. Prices rose faster than incomes stretching affordable.
How Much Will House Prices Fall?
Whilst the credit crunch lasts, mortgage availability will be limited. This will keep demand very low. Some predict credit crunch could last until 2011 and there is little the government can do about it.
Possibility of recession or severe slowdown means rising unemployment and depressed real wages. Combined with rising costs of living, this will depress demand.
However, as prices fall, buying will become relatively more attractive than renting. Combined with constrained long term supply, there is prospects of house prices regaining their upward trend in 1-2 years when the worst of the credit crisis is over.
Nominal House prices increased by 1,672% or £174,000
Real terms house prices increased by £119,085 or 164%
Note there is a much bigger change in nominal prices than real prices. It also means that with house prices falling now, the real effect is even greater. If house prices drop by 10% in nominal terms, it means in real terms for drop is closer to 13%.
The data is collected by the Nationwide one of the UK’s largest mortgage lenders. Nationwide
There are concerns that the UK could enter into recession. If this is the case, it would further weaken the UK economy. A recession would lead to higher unemployment and lower consumer confidence. Both these factors would have a negative impact on the Housing Market. Because housing costs are such a large % of income a fall in income would lead to lower demand and cause a big fall in house prices.
The only benefit of a recession, as far as the UK housing market is concerned, is that it could lead to lower interest rates. IN a recession, inflation usually falls and this means the MPC will be able to cut rates. However, this particular recession may not be straightforward as we currently have a slowdown and higher prices e.g. rising oil and food prices. If a recession is accompanied with a stubborn inflation rates, interest rates may not fall, further reducing the demand for the housing market.
Rising demand for second houses has caused higher prices, especially in local property hotspots such as tourist areas like the Lake District.
This can cause economic problems. In particular, local first time buyers may be forced out of the market. Therefore, they will either have to rent, or they may be encouraged to leave the area. This can cause a shortage of labour and damage local economies e.g. shops can’t get people to work. In addition, it can change the nature of local areas because it is populated by ‘visitors’ as opposed to people who live there throughout the year.
On the other hand, people who buy second homes may bring wealth and spending power into the area. It depends how long they spend in their second house. If it is only 2 or 3 weeks a year then the area will not benefit. If they rent the house cheaply to local people in the intervening years it will be less damaging.
It also depends whether supply can increase to meet the demand for second houses. The problem in the UK is that it is often difficult to build new houses, especially in these tourist areas most affected by people buying second houses.
This is probably the biggest factor at the moment. Since the credit crisis of 2007, when many US subprime mortgages were defaulted on, there has been a shortage of available finance. Because banks lost money lending in America they are reluctant to lend to new homeowners. British Banks are asking for bigger deposits and are charging higher interest rates. Therefore, many people who would like to get a mortgage are unable to find a deal in the current climate. This means many first and second time buyers are having to rent rather than buy. This is causing a big fall in the number of people able to buy.
2. The ratio of house prices to incomes increased to an unaffordable level.
The long term average for house prices to income ratio is about 2.5 - 3. Currently it stands at 5. This means the average worker needs to take out a mortgage upto 6 or 7 times their salary. However, banks will no longer lend this amount of debt. Therefore, many, especially first time buyers simply can’t afford to buy.
