A glimmer of light in the housing market gloom

This month's figures are all down, but not by as much as last month's. And the steep decline suggests recovery will be rapid, writes Richard Northedge
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The Independent Online

It was a typical week in the housing market. The Bank of England forecast 1.2 million households in negative equity, data showed repossessions rising 71 per cent, mortgage redemptions exceeded new lending for the first time. Property prices have fallen 8 per cent, said the Land Registry; 14.6 per cent, claimed Nationwide; 29.6 per cent, according to auctioneers – and they will plunge another third, say futures contracts.

Yet despite the gloomy headlines, there is light at the end of the housing tunnel, even if the exit is still far away. For a start, October's 1.4 per cent fall in house prices was the lowest recorded by Nationwide since June and is below the average of the previous eight months. And mortgage approvals, though still low, rose for the first time in a year.

Those may be rogue figures, but at least they end the relentless deterioration in housing statistics since the market turned last autumn. And if the price fall is a correction, then it is working by bringing prices back to affordable levels.

At the peak, the average home cost six times buyer income. That is now down to five times and Oliver Gilmartin, the senior economist at the Royal Institution of Chartered Surveyors, says: "With sharp falls in prices we anticipate that could fall back to more sustainable levels of about four and you'll start to see first-time buyers moving back into the market."

After the boom of recent years, prices are about to reach their long-term norm – the value they would be if they had simply kept increasing at the steady 2.9 per cent a year above inflation they have averaged over previous decades. So after the years when homes were expensive, they are on the brink of becoming cheap by historic standards.

However, they will become even cheaper before prices bottom. Values may not dip as far below that long-term trend line as they overshot, but crossing the boundary from above average to below does suggest the market is about halfway through its collapse.

"We could be," agrees Fionnuala Earley, Nationwide's chief economist. "Peak-to-trough falls could be in the region of 25 per cent, so we are about halfway, but there's so much uncertainty around."

Some analysts expect the total fall to be 30 per cent or even more, but the annual decline is expected to be steepest early next year. It should be replaced by positive property price inflation in 2010, making this downturn much shorter than the housing slump from 1989 to 1993.

An interest rate cut this week would make mortgages cheaper, providing some cheer for homeowners and prospective buyers, and it should be followed by further cuts during 2009. But competing with an easing of pressure in the housing market will be the deepening recession in the rest of the economy.

Gilmartin says: "We'll see unemployment rising through 2009. That's really going to have an impact on people who cannot meet their mortgage payments, so it'll be at least 2010 before we see a turnaround. But by this time next year, we'll be seeing more confidence in the banks and once people regain that confidence, you could see a quick change in the property sector."

The data economists want to see is an upturn in the volume of sales. Last month's small increase in mortgage approvals could be the start of that turnaround. "At the moment, you're only getting people transacting who have to transact," says Gilmartin. "But mortgage approvals are now so low that the likelihood of them falling further is minimal. Mortgage approvals will lead house prices by four to six months," he forecasts. "Volumes will start to increase first."

Earley agrees, saying: "If we were to begin to see significant increases in activity and transaction levels that would be a signal people felt more comfortable that it was a good time to buy."

She is puzzled by the low level of sales because the last time turnover rates were so low was in the early 1990s, when the country was well into recession, unemployment was high and interest rates double today's level. But she is certain tight supply is not holding back sales: estate agents have more homes on their books than they have had for a decade. "The sharp fall in prices has not yet led to an increase in market activity," she says.

But supply is expected to tighten, not least because troubled housebuilders have slashed their output dramatically. And owners who do not need to move are likely to take their property off the market rather than cut their asking prices.

As the Bank of England warned last week, continuing price falls will plunge many owners into negative equity, preventing them selling because the proceeds would not cover their mortgages. But while they maintain their loan payments, owners can sit out the slump until prices rise again. Government pressure on lenders should prevent a flood of repossessed homes depressing the market and last week's statistics showed repossessions in line with industry expectations despite the worsening economy. Demand, meanwhile, ought to be stimulated by the cheaper house prices and lower mortgage rates and a relaxation of lending conditions as banks accommodate government demands on loan policies. Also, once it is clear the fall in prices is slowing, banks are expected to lend a larger proportion of the value again because their security will be safer.

And the longer the housing slump lasts, the greater will be the pent-up demand from people wanting to purchase their first home or to trade up. Transaction levels were low even before the market turned because many people were unable to pay the high prices; now they are put off by the falling ones.

But Gilmartin says: "The twin effect of pent-up demand and the huge drop-off in construction, which we expect to extend well into next year, will add to the upswing."

There is also hope that the stamp-duty holiday on purchases of under £175,000 announced recently by the Chancellor, Alistair Darling, will encourage people to buy before it expires next September.

The threshold was chosen because it was the average UK property price, but by next summer the average will be about £20,000 lower, making a large majority of sales exempt from the 1 per cent tax.

"The Chancellor damaged the market by talking about introducing the holiday," complains one Midlands estate agent suffering slow sales. "What he must not do is talk about extending it, or buyers will put off their purchase plans."

Estate agents know that all slumps eventually bottom, but there are signs prices are falling so steeply that this one will reach its nadir quickly. If property has collapsed so far it is about to be cheaper than its long-term average, it will be very cheap by the end of 2009 and opportunistic buyers, including the hundreds of thousands of people who have postponed purchases in recent years, should be tempted back into the market.

Next year's headlines should show smaller price falls, higher lending and more sales.

"Once people see property has bottomed," says Gilmartin, "they'll understand the long-term benefits of holding an asset that is hedged against inflation."