House Price Growth in the UK in the past 15 years.

After experiencing a fall in house prices of 25%, UK house prices look to be stabilising, however, they are stabilising on thin levels of housing transactions.

Many homeowners and the government will be hoping for greater sustainability in the housing market rather than the boom and bust growth which has characterised house prices in recent decades.

If there remains an underlying shortage of housing in the UK, house price growth may continue to keep house price to earning ratios high.

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.
• People can’t afford to buy a house.

• Factors which determine house prices
• Why UK House prices are subject to Boom and Bust

The main house price surveys include:

Halifax Price Index. Halifax is one of the UK’s leading mortgage lenders. This gives it an insight into the UK Market.

Nationwide Price Index. The longest running house price index. See: Nationwide historical house price index

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.

Government House Price Survey. The government produce a monthly price survey of house price transactions. It is generated from 50 mortgage lenders through the survey of mortgage lenders. Government House price survey

Land Registry. The land registry takes into account all property transactions. It is able to compare the price of a house bought and then later sold. This gives an accurate insight into how much prices have risen, because it is comparing the same house, rather than average house prices. They produce a quarterly survey and monthly report.

Rightmove. Rightmove.co.uk is a property website which tracks the asking prices of houses. Note, selling prices may differ from asking prices, especially in times of rising or falling house prices. Rightmove also give access to the Land registry data, which includes all actually selling prices.

Hometrack. Hometrack.co.uk is another property website. They collect info on the state of the market by surveying 3,000 estate agents about whether prices are rising or falling

Search Land Registry archive for house prices at www.houseprices.co.uk

• 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

See historical data of UK 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.

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.

The motives for buying a second home are often split into:

• Desire to have holiday home / 2nd house.
• Desire to make capital Gains from rising house prices. With change in fortunes of UK housing market, there may be less demand in forthcoming years.

Forecasts for Second Homes in the UK

In addition to tourist areas. Demand for second homes is also increasing in University towns, where parents can sort out accomodation for their children and have the potential for capital gains. Towns like Bradford and Manchester have the best potential for future capital gains.

Popular Areas for Second Homes in the UK

London, Snowdonia, Birmingham

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.

3. Expectations of Falling House prices.

People are now pessimistic about the prospect of the UK Housing Market. They expect falling prices and so buy to let investors have less incentive to enter the market; they have a good incentive to sell. These negative perceptions are becoming self fulfilling.

4. Slowdown in the economy.

The UK economy is still growing, but, the growth rate has fallen and unemployment is likely to increase. Therefore, people are more cautious about buying. People’s living standards are also being squeezed by rising oil and food prices; leaving less discretionary income for spending on the housing market.

Also in recent years, the availability of mortgage finance has played an increasing role in influencing house prices. When mortgage companies are keen to lend a range of unconventional mortgages demand for housing will rise. But, in a credit crunch mortgage products are withdrawn leading to lower demand.

For more detailed analysis see: Factors that determine house prices 

The house price falls are worst in areas such as Northern Ireland, the South West and East Anglia. Areas least affected include London, Yorkshire, and Scotland.

Lower prices are being driven by difficulties in the mortgage lending industry (see: can I still get a mortgage?), which have seen falls in mortgage lending by upto 40%.  The difficulties in the mortgage sector have occured because of the shortage of credit in the money markets. Many big financial institutions are experiencing grave difficulties in getting sufficient funding and the crisis may worsen before it gets better.

Will the Bank cut Interest rates?

If the Bank of England cut interest rates, then it may stem the house price falls because it would make the cost of borrowing cheaper. However, the persistence of cost push inflation makes cutting rates more difficult and so homeowners may not find mortgage rates any lower in 2008.

Factors which will prevent a crash of 1991

• Supply constraints still remain
• Interest rates are lower than in 1991. In 1991 interest rates were in double figures for several months making the cost of mortgage payments more than at present. The cost of mortgage payments is below the historical high

These factors could contribute to housing price fall

1.  Increase in Mortgage Rates. Many banks are increasing their interbank lending rate; this is being passed on to consumers. Therefore, there is an increasing gap between the Bank of England’s base rate and the lenders Standard Variable Rate. This makes mortgages more expensive, despite base rate cuts.
2. Reduction in Number of mortgages available. The big mortgage lenders have been reducing the number of ’subprime’ and risky mortgage products. For example, 125% mortgages have been stopped and 100% mortgages are very rare. Mortgage lenders like the Nationwide have demanded a much bigger deposit from borrowers. With a marked fall in mortgage lending the demand for housing will continue to weaken.
3. People coming to an end of Fixed Rate Mortgage Deals. Many in the UK, were benefitting from being on low fixed rate mortgage deals. However, as these 2 or 3 year deals come to an end they will have difficulty switching to a new mortgage in the more difficult climate. Some will not be able to afford the new payments and so may end up with having to sell.
4. Decline in confidence. People now expect house prices to fall rather than rise and therefore, the motivation for buy to let is lower. Some property investors may take the opportunity to sell.
5. Long Term disparity between incomes and house prices. House prices have been rising faster than incomes and therefore, there is an increasing lack of affordability amongst first time buyers.