This graph shows house prices in the UK since 1952, when the Nationwide building society started keeping records. House prices were a mere £1,891 in 1952. By 2007, they had climbed to just under £185,000.

If house prices had kept inline with inflation then a house should be worth £43,701.01 This reflects how mortgages have become more accommodating. Also, parents have used their wealth to help children get a deposit and bigger mortgage

Within this trend for higher higher house prices – two slumps stand out in the late 80s to early 90s and at the end of the 2000s. However, house prices have continued to rise faster than inflation.

• House price statistics

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.

A video on looking at the problems of the UK Housing Market.

Why House prices are falling.

Why is it difficult to deal with falling house prices.

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.

• 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

The main reasons behind the housing slump include;

1. Freezing up of mortgage sector. Banks saddled with bad detbs are unwilling to lend to first time buyers.
2. 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.
3. 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.

The drop in house prices is not the biggest fall since the Great Depression, and in some cities it is even worse.

Despite interest rates of 2%, the demand for houses has dried up due to:

• rising unemployment
• Falling availability of mortgages
• Tighter credit criteria

More on Falling US House Prices

• 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.