House prices
have dropped by 0.6 per cent in March, bringing the annual rate of house price growth down to 1.1 per cent, Nationwide has revealed.
The figures come amidst global financial instability and news that housing market activity is decreasing. The average cost of a house in the UK is now £179,110, just £2,027 more than this time last year, and according to Nationwide, prices will continue to fall.Nationwide’s Consumer Confidence survey has found that since September, when house prices experienced a boom, consumers’ expectations of house price growth have fallen sharply, with consumers, on average, expecting a 3 per cent fall in the next six months. Fionnuala Earley, Nationwide’s Chief Economist said:
“This fall coincides with turmoil in the financial markets and is likely to have been compounded by the problems at Northern Rock, but it also reflects the signs of slowing in the more visible annual rate of house price growth and house purchase approvals data. House price growth expectations responded dramatically to all of these factors.” The time for reselling a property and maximizing on conveyance opportunities is now, before the lash of the credit crunch may ruin any chance of home resale.
At the moment, the lack of mortgage finance is one of the most significant factor in falling demand for housing. The Council of Mortgage Lenders suggest that mortgage approvals have fallen to the lowest levels since 1991. Upto July 2007, mortgage lenders were very competitive and eager to attract customers with mortgage products such as 100% mortgages and high income multiple mortgages. However, the credit crisis has led to banks struggling to raise finance, therefore they have had to reduce their mortgage lending. To ration mortgages, they have removed many mortgage products, especially 'subprime' products. They have also increased the cost of many other mortgages.
In particular, it is becoming increasingly difficult for first time buyers to get on the property ladder. This is mainly due to the rise in house price to earnings ratio. In the past this problem was got around by banks being willing to offer 'generous' mortgages (e.g. interest only, self certification, 100% mortgages). For example, in the past, the Abbey National lent 5 times a borrowers salary. This increased generosity in lending helped to keep the market buoyant without addressing the underlying problem of overvalued house prices. The Credit crunch has now made this difficult.
For those who believe house prices can never fall, it is worth remembering the case study of Japan. In the 1980s there was a similar boom in house prices in Japan. But since the peak of 1991 house prices in Japan have fallen for 14 consecutive years, leading to considerable economic problems such as lower consumer spending. House Prices have also started to fall in the U.S.A. US prices have now fallen considerably since their peak in 2007. Traditionally, the view of the housing market is that it is not just an asset, but a place to live. Therefore, unlike the stock market, house prices won’t rise and fall due to speculation. However a lot of demand for UK housing is coming from buy to let investors. Many buy to let investors are in the market for the long term; however, now that prices are falling, some of these speculators are likely to leave the market causing a significant drop in demand.
In a research paper Alex Hamilton argues that much of the housing market is dominated by herding behaviour. (Source 2) This means that a lot of the rise in demand is caused by market sentiment rather than economic fundamentals. Now the market sentiment has changed people are less confident about buying. In a recent paper, the OECD stated that 15% of UK house prices were not reflected in economic fundamentals but 'froth' and 'speculation'
The UK housing market suffers from severe supply constraints as a % of the total housing stock. The number of new houses built is relatively small. Therefore a change in demand magnifies any change in price. It only takes a small rise in demand to increase prices. But similarly it could only take a small fall in demand to cause significant price falls as in 1991.
