Recent reports claim house prices fell for the second month in a row in July. While the previous months have seen only increases, the recent falls have fuelled speculation that the UK is heading for a second recession. This hasn’t been helped by the fact that business secretary Vince Cable has claimed a double dip could be on the cards.
But can a two-month price fall really be the sign of a house price crash or even a second recession? Or does it just demonstrate the volatility in prices and how they are calculated?
Back in the heady days of the pre-credit crunch world you couldn’t open a newspaper or watch the news on television without seeing that house prices were on the ascent.
The average house price was in the region of £200,000 and lenders, brokers and home owners were rubbing their hands with glee. Ever-increasing prices charac-terised the boom period and it seemed as though little could go wrong. Fast forward to 2006 and cracks started to appear.
The liquidity crisis and subse-quent credit crunch saw the eco-nomy take a battering and house prices began to tumble, although not as much as some may think.
The latest Land Registry figure, which covers England and Wales, puts the average house price at £166,000 for June 2010 and £181,000 in June 2007, a fall of 8.3%.
But LSL Acadametrics reported an average house price of £220,565 for June 2010 compared with £224,743 for June 2007, a fall of only 1.9%. By contrast, Nationwide Building Society’s average house price figure for July 2010 was £169,347 compared with £184,270 in July 2007, a fall of 8.1%.
It goes without saying that everyone from top economists to the person on the street is now watching nervously to see in what direction house prices will go next. But with such a wide disparity in the data available on average house prices, predictions on where they will head are equally wide-ranging.
House price activity differs considerably depending on geographical area, supply and demand and type of property
“In spite of some commentators talking about house prices bottoming out and green shoots of recovery appearing, the predictions vary widely,” says industry consultant Mehrdad Yousefi.
“To take just a sample of the indices in the last few weeks, the Centre for Economics and Business Research says the end is in sight for the housing slump, though the average price has a further 8% to fall. This is modest compared with Jones Lang LaSalle which is forecasting that prices could fall by another 14% before the end of the year as the impact of rising unemployment hits sales and household finances.
”Figures from estate agent Knight Frank show prime central London house prices rose in April 2010 for the first time since March 2008.
“Even the indices which measure historical house prices don’t agree,” says Yousefi. “The Land Registry – which is the most reliable information source since it is based on completed sales – says prices have fallen by 16.2% over the year to the end of April 2009.
“But the Halifax index reckons they are down 17.7% year-on-year. But since the areas and properties sold differ how can the indices truly reflect what is happening?”
Yousefi says the Land Registry figures are at least six months out of date because that’s the time it takes for prices to be logged.
Also, its figures vary from those compiled by mortgage lenders as the Land Registry includes unmortgaged properties and len-ders’ indices are based on mortgage advances.
“The difference between Halifax and Nationwide’s figures is easy to explain,” says Yousefi. “Both are based on their own lending figures, but because Nationwide’s lending is more weighted towards London and the South-East than Halifax – which has a more even spread nationally – there are bound to be discrepancies.”
House price activity differs considerably depending on geographical areas, local supply and demand and the type of property. In essence no street is the same and there can be a similar problem with the individual houses on streets, depending on where they are positioned.
Yousefi gives the example of prices varying from one side of a street to the other if there is a railway line running behind the houses on one side and this also affects the indices.
“Then you have indices from prop-erty websites like Hometrack that measure asking prices – which is not the same thing as actual selling prices,” he says.
“Hometrack reckons house prices are down only 10.1% over the year to April 2009 although this probably reflects home sellers’ optimism more than reality.”
Hometrack’s figures are based on a sample of estate agents which provide the number of viewings for properties, the time they take to sell, asking prices and prices achieved. Some people believe it is a much better indication of what is really happening in the market.
Hometrack sends out a monthly questionnaire to over 6,000 agents and covers every postcode in the country. Yousefi says that because the questions are the same every month, the replies can be compared with previous responses and provide a good indication of what prices are doing for various property types.
The Royal Institution of Chartered Surveyors does a monthly survey of the housing market based on chartered surveyors’ estimates of what is happening in their area. It has become less negative in recent months, with enquiries by potential home buyers increasing for the sixth consecutive month in July.
“RICS expects property prices to drop by a maximum of 30% from peak to trough before a gentle recovery,” adds Yousefi. “RICS’ chief economist Simon Rubinsohn told mutuals at the Building Societies Association’s recent conference that he expected prices to hit their lowest level by the end of 2009 before modest gains begin. He has a long track record of being right.”
LSL Acadametrics’ index is based on every residential property transaction in England and Wales, which, it claims, allows it to provide a true measure of house price inflation.
The validity of house price indi-ces were recently called into ques-tion and the Office for National Statistics has launched an investi-gation into them.
“We are reviewing the coherence and comparability of housing statis-tics because lots of different figures come out from a variety of public and private sources and we want to look at them to make sure they are providing correct information,” says an ONS spokesman.
The main reason for the rise in prices earlier in the year is supply and demand. The credit crunch affected public confidence and as a result fewer people were putting their properties on the market, which made buyers desperate. This led to a seller’s market.
“The problem for buyers and sellers is to know which index to believe and whether it is relevant to their property,” says Yousefi. “This downturn is much like the house price collapse in the early 1990s. Home owners who don’t have to sell sit tight and only less desirable properties come onto the market, which again distorts the picture.”
But in the last couple of months more properties have been put up for sale. The abolition of Home Information Packs by the coalition government has encouraged more sellers to put their homes on the market, particularly at the lower end. Rightmove says over-supply of property and buyers going away on holiday has led to less demand, forcing sellers to lower their asking price.
“No-one wants to come to market in August unless they have to,” says Miles Shipside, director of Rightmove. “It shows these new sellers have a compelling need to sell as they have lopped over £4,000 off the average asking price.
“Those who marketed their property earlier in the year but have yet to find a buyer may have to do a bit of pruning of their own to beat this new ompetition. Holidaying buyers can relax on the beach while back at home, sellers are reducing the cost of their future property by the price of the family holiday.”
But is this trend going to last? This is a hard question to answer, especially when the UK breaks down into many regional housing markets, each with their own individual peaks and troughs.
“There is no such thing as a single housing market,” says Melanie Bien, director at Private Finance. “The prime market is still performing strongly as there is plenty of demand from overseas. The wider London and South-East markets are also strong although with more supply starting to feed through buyers are in a firmer position than they were several months ago.”
But she adds that there are fears that big losses of public sector jobs, particularly in the North, will have an impact on the housing market so people are selling sooner rather than later.
“There are also worries that mortgage funding is going to be harder to come by next year as banks have to pay back the special funding schemes, so now may be the best time to buy,” she says.
The Council of Mortgage Lenders also believes funding will play a big part in determining house prices.
“In our recent market commentary, we mentioned that there are signs of house prices stabilising and more properties coming onto the market following the abolition of HIPs,” says a CML spokeswoman.
“This may improve liquidity in the market, but transaction levels are subdued and likely to remain so while access to credit remains constrained.”
Of course, figures aside, one can’t underestimate the impact of emotion on the housing market.
“Sentiment is the most important factor,” says Bien. “If people are worried about their jobs and the future, they are unlikely to take the plunge and make such an expensive purchase, so we could see more people holding off buying property.
“Similarly, public sector cuts will mean many people aren’t in a position to commit themselves to a purchase. The lack of first-time buyers will also make it difficult for those who want to sell.”
But it’s not all doom and gloom in the housing market.
“The silver lining is that low interest rates are likely to be maintained for an extended period because the economy is in such a mess and the ability of the banks to increase lending is still limited,” says Ray Boulger, senior technical manager at John Charcol. “So although consumer confidence is likely to fall over the next year because of public spending cuts and increased taxation, this negative for the housing market will be balanced by the extended period of low interest rates.”
Obviously one of the main things driving house prices is consumers’ ability to afford property. .
“The problem is defining affordability, which is much better for many owners on low trackers or SVRs than for new purchasers with only a modest deposit,” says Boulger.
Boulger says most affordability statistics are based on new purchasers, which is logical as the statistics are used to try to establish affordability on purchases.
“But because of the huge variation in mortgage rates at different LTVs, affordability for someone with a 40% deposit is different to affordability for someone with a 15% deposit,” he says. “So inevitably using an average will seriously understate affordability for someone with a big deposit and seriously overstate it for those with only a small deposit.”
The problem for buyers and sellers is to know which index to believe and whether it is relevant to their own property
Boulger adds that even if rates were the same, whatever one’s LTV those with a bigger deposit can afford a more expensive property because any given mortgage payment would allow a more expensive property to be purchased if a larger deposit was put down.
“When assessing affordability in practice any sensible person would work on a higher rate than the current initial variable rate but an affordability statistic works on current mortgage rates, so it’s an inexact science,” he says.
“When assessing affordability, or indeed a house price to earnings ratio, one also needs to consider whether one is taking two incomes into account or just one. This can make a huge difference.”
Boulger argues that if the statistics are prepared on a consistent basis they can provide a useful indication of affordability but there are so many variables it is impossible to be too precise.
With such a lack of direction in terms of where house prices are going consumers and experts will no doubt continue to keep a close eye on the property market. We’ve already seen dramatic variations in the different house price indices this year. So the only thing that you can conclude with any certainty is that to use any of the numerous indices individually as evidence of a recovery or a double dip would be premature.
House prices will remain broadly unchanged for the rest of the year
There are several different house price indices for the UK which can be used when determining house price activity. Nationwide Building Society publishes a monthly index based on the agreed purchase prices in its monthly sample of mortgage approvals.
The index is mix-adjusted to control for variation in the mix of properties in the sample each month. For example, if the sample in June shows primarily flats while the sample in July has primarily detached houses, the mix adjustment ensures that there is no artificial increase in the average price caused simply because the mix changed between months to include more expensive property types.
Other characteristics controlled include number of bedrooms, region, whether the property has a garage, the socio-demographic characteristics of the postcode area and number of bathrooms.
Halifax publishes a house price index using a similar methodology to Nationwide. In addition to the lender indices, the main indices are those published by the Land Registry and the Department for Communities and Local Government. These are based on completed housing transactions rather than approvals, some of which may not result in a completed sale.
Price movement will be influenced by the impact of fiscal measures on incomes and availability of mortgage credit
So what are house prices doing at the moment? Prices on the Nationwide index rose 2.4% over the first seven months of 2010. Between October 2007 and February 2009, house prices fell by 19.3% as a result of the financial crisis and recession. Since February 2009, house prices have rebounded by 11.5% but remain 10% below the October 2007 peak.
There are several reasons for this. The rebound in house prices since early 2009 reflects a shortage of property for sale as many potential sellers were unwilling to market their properties into a depressed market. The number of active buyers remains subdued relative to historic norms, due to tight mortgage credit conditions, high unemployment and uncertainty about the future economic outlook.
So what do we expect prices to do from here? They are widely expected to be broadly unchanged for the remainder of 2010. Looking at what issues affect house prices can be useful. Movement will be influenced by a wide range of factors, including the impact of fiscal austerity measures on consumer incomes, the availability of mortgage credit and the level of interest rates.
House prices from 2004 to 2010
senior economic adviser
Royal Bank of Scotland
Reasons to expect some price fallsThis time last year few people would have predicted that house price growth would accelerate as quickly as it has over the last year, and the recovery was indeed surprising given the sluggish state of the economy. But where are we going from here?
If you were to look at the various house price measures you would be forgiven for being puzzled about what’s happening. And the review of house price indices announced recently by the Office for National Statistics suggests you wouldn’t be alone. The Halifax index reports that prices grew by 4.7% over the last year, while Nationwide reports 6.7% growth, the Land Registry 8.4% and the Department for Communities and Local Government 8.1%.
And in the last four months, price growth reported by the Halifax and Nationwide Building Society indices has differed in magnitude.
To see what’s really going on and gauge what’s likely to happen in the future, it’s best to look at the data together. The average of monthly changes in the Halifax and Nationwide indices – the measures of choice for the Bank of England – has been broadly static over the last three months, as has the Land Registry.
To see what’s going on and gauge what’s likely to happen in the future, it’s best to look at the data together
The Royal Institution of Chartered Surveyors reports that agents believe prices fell over the last three months for the first time in a year. The 0.2% pace of fall implied by the survey is consistent with the other measures, although in many areas agents are still reporting rising prices. The Department of Communities and Local Government measure has been much more buoyant, recording 0.7% growth in May.
But much of that can be explained by the fact that its measure is influenced by stronger house price growth in the higher priced areas of London and the South-East.
Each of these measures tells us what has happened with past transactions and the recent trends, coupled with the expectation of tough economic times ahead, suggest a sluggish market ahead. Indeed, there does seem to have been a marked change in sentiment since the spring.
Estate agents expect prices to fall in most regions over the next three months. And consumers’ view of house prices, recorded by Nationwide, has shown a moderation in their expectation of price growth since March.
Overall there are good reasons to expect some falls in house prices over the coming months. Easing supply is a factor but more importantly, bumpy economic conditions ahead will affect demand as incomes are squeezed and people become cautious about moving house in an uncertain labour market. But bumpy economic conditions mean interest rates will remain low for longer which will keep forced sales low and continue to be a supportive factor for the housing market.