The housing market has entered a weak period everyone agrees on that. Mortgage approvals are 30 per cent below those of a year ago, and prices have started to fall. According to Halifax, the largest lender, prices fell in September, October and November, a total of 2.3 per cent, and the first consecutive three-month fall in 12 years. The trend is unlikely to improve. Forecasters have pencilled in zero-growth for 2008 the lowest since 1993, when they fell 2.5 per cent.
The housing market is important, because it affects consumers' confidence and their willingness to spend. Previous dips in prices, such as in the summer of 2005, were met with cuts in interest rates to make buying more attractive. After September 11, the Bank of England (right) cut rates aggressively to 3.5 per cent, triggering a 26 per cent surge in house prices in 2002. In December last year, the Bank cut the base rate to 5.5 per cent. In the year ahead, analysts expect rates could fall to 4.75 per cent. Stuart Law, chief executive of property investment company Assetz, says that could bring base-rate tracker mortgages down to 5 per cent.
Those cuts could, of course, help people afford bigger mortgages, and in turn lead to a rise in prices. But it's worth remembering that zero growth could be good news. Nationwide says the ratio of first-time-buyer mortgage payments to take-home pay is close to an all-time high. Fionnuala Earley, its chief economist, says: "For affordability to come back to long-term norms, earnings growth needs to outpace house-price inflation, or interest rates need to come down." The only alternative is a sharp fall in prices. One caveat is that continued above-target inflation would prevent the Bank cutting interest rates as aggressively as it has in the past.
Watch out for:
Interest-rate decisions; monthly house-price indices published by Halifax and Nationwide.
The credit crunch
A key difference between this current wobble and the dips experienced in previous years is that mortgage lenders are being buffeted by factors other than bank rates.
The credit crisis that began in August is forcing all lenders to tighten their belts. They have become more careful about whom they lend to and on what terms.
Meanwhile the credit squeeze has made it harder for lenders to get hold of new funds at low interest rates. "This is bound to weigh down on housing market activity," says Howard Archer, chief economist at Global Insight consultants, which predicts a 3 per cent fall in house prices this year.
Tighter conditions will make mortgages unaffordable for even more first-time buyers, which will undermine demand at the bottom of the market. At the same time it will hurt homeowners coming off fixed-rate deals on to variable rates.
Watch out for:
The interest rate at which banks lend to each other. This is known as Libor (the London Interbank Offered Rates). Keep an eye on the best mortgage deals and track how they change.
Optimists say that recessions are triggered by major economic downturns and surges in unemployment, leading to rising repossessions. In the recession of 1991 and 1992, some 150,000 families lost their homes.
Currently, the number of people out of work and claiming benefit is at a 32-year low. Annual growth in wages chunters on at 4 per cent. But Howard Archer, chief economist at Global Insight, points out that the biggest risk is a sharp economic slowdown pushing up unemployment "significantly". "This would be liable to lead to a marked increase in the number of people having to sell for distress reasons," he says. Few expect such a dire outcome. Most City economists expect the number claiming benefit to rise by about 100,000, or 14 per cent, but this would simply wipe out the improvement in 2007. They also foresee the economy growing by 2 per cent next year much lower than last year's 3.1 per cent, but a mile away from the 1.4 per cent slump in 1991.
Even so, there will be job losses and lower bonuses in the City, which will sap demand at the top end of the housing market. And while it may sound heartless, a repeat of the repossessions of the early Nineties would create buying opportunities particularly at the bottom end of the market.
Watch out for:
Unemployment figures; news of redundancies; auction signs going up on homes which might be a buyer's big opportunity.
One reason why house prices have trebled since 1997 is a long-term mismatch between supply and demand as households grow, there are not enough new properties being built to accommodate them. While this is a problem for many buyers, it could prove to be the housing market's saviour. The Government's Housing Green Paper says current house building is falling short of projected figures by 38,000 units a year. The Green Paper pledges to deliver 240,000 new starts by 2016, but Nationwide says this won't alleviate shortages this year.
Martin Ellis, chief economist at Halifax, says revisions to population projections mean demand could soar. "The shortfall could be even higher," he says. Steve Cox, operations director at Spicerhaart Financial Services, believes this will underpin a 2 per cent price rise. "As affordability constraints are eased and demand continues to outstrip supply, the long-term future is set to be bright," he says.
A related prop for the market has been strong interest from overseas buyers. There are trillions of pounds swilling around in the Asian tiger economies and the oil-rich Arab world. Those economies are set to perform well as the West slows, making it likely that more foreign investors will buy properties.
Watch out for:
Any signs of anything other than luxury apartments being built. If no one is building "normal" homes, demand at the bottom of the market could soar.
The credit crunch will put many households under severe pressure. The Council of Mortgage Lenders forecasts the number of home repossessions rising from 30,000 in 2007 to 45,000 in 2008. This would be the highest since the mid-1990s, although it is still well off the peak of 80,000 in 1991.
The CML, which forecasts a 1 per cent rise in prices this year, says the Government's safety net for hard-pressed homeowners now provides the lowest level of support in 20 years.
Currently, the Government can contribute towards someone's mortgage payments in certain circumstances, but there's a limit to the size of the mortgage that can qualify. That limit stands at 100,000, but it hasn't been raised since 1995.
The CML urges the Government to raise the maximum mortgage that can qualify for relief to 300,000 to match house-price inflation. The pressure will intensify in the run-up to the 2008 Budget.
Watch out for:
Repossession figures are bound to be big news in the months ahead. Much will depend on Alistair Darling's Budget, in the spring.
The boom in investors buying homes to rent out may be the housing market's Achilles heel. In 1998, there were just 29,000 B2L mortgages; now there are 895,000, or 10 per cent of all mortgages. Falling house prices, rising mortgage bills and tighter lending conditions will discourage investors from entering the market, and act as another brake on demand.
Meanwhile, investors who took on too much debt or made foolish assumptions about rental yields could be forced to sell. This is why some pessimists dub B2L as Britain's "subprime" a reference to the loans to poor American homebuyers that sparked the global credit crisis.
Given that prices have only fallen in the last few months, however, the drop will only affect the most recent entrants. The majority of investors are sitting pretty on a capital gain.
Nationwide's chief economist, Fionnuala Earley, says that B2L was driven by households seeking to bolster their pension position rather than attempt to play a speculative game. "Most landlords are long-term investors rather than speculators, and would not exit the market abruptly," she says. "Those in it for the long-haul can expect satisfactory returns."
Stuart Law, of Assetz investment advisers, says that despite recent falls, the history-high house prices will encourage people to rent, which will keep rental yields stable.
Watch out for:
A sudden outbreak of 'for sale' signs in key B2L areas, such as university towns and cities. Keep an eye out for headlines about falls in rents.
So, what's the overall verdict?
There is no doubt that 2008 will be a bumpy ride for homeowners. The consensus is for at least one year of below-inflation growth, but a slump cannot be ruled out. As Fionnuala Earley puts it: "The future is inherently uncertain."