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.