Fears for housing market as price growth slows

Hometrack predicts house price fall in England and Wales next year
Click to follow

The housing market has markedly slowed during December, though analysts warn that it is too early to say whether the setback shows the recovery is running out of steam or marks the traditional Christmas lull.

Figures to be published today will show that house prices across England and Wales have risen by just 0.1 per cent this month, and that there has been the first fall in the number of new buyers registering an interest in the market since January.

While Christmas is traditionally a slow period for estate agents, the data compiled by the property analyst Hometrack will cause concern because experts have been predicting for some time that the strong recovery in the market during the second half of 2009 was not sustainable.

Hometrack said the December house price rise of 0.1 per cent followed 0.2 percentage point increases in each of the last two months. Most significantly, however, price increases were reported in just 11 per cent of regions of the country this month.

Nevertheless, the latest average gain in house prices does at least mean that England and Wales have ended the year closer to positive territory. During 2009 as a whole house prices dropped by just 1.9 per cent, according to Hometrack.

The slowdown in house price growth this month follows a fall in the volume of sales agreed in the run-up to Christmas, but also a sizeable drop in buyer demand, with the number of new buyers registering with estate agents falling by 2.2 per cent.

This could be the first sign that the strength of the housing market recovery this year, which has been driven by strong demand and limited supply, may now be petering out.

Across England and Wales there has been a 41 per cent increase in buyer demand during 2009, rising to 70 per cent in London. By contrast, the number of homes for sale has risen by only 7 per cent.

"Unexpectedly buoyant demand and a chronic lack of housing for sale were the key drivers of the housing market in 2009," said Richard Donnell, Hometrack's director of research. "While a scarcity of housing for sale is set to remain an important feature of the market in 2010, it is the prospects for demand that will dictate the outlook for prices in the next 12 months."

Mr Donnell said that Hometrack did not expect to see any significant increase in the number of homes for sale this year, but warned that there was a possibility of a drop in demand, which would threaten the continuation of the price gains seen in recent months.

Hometrack is now forecasting that house prices in England and Wales will fall by 1 per cent over the course of 2010, which will disappoint those who had hoped that the market was heading back towards the highs seen in the first part of 2008.

One major problem is the difficulty that many would-be house purchasers are having securing mortgage finance. While lenders have relaxed some of their strictest criteria as the credit crunch has eased, most still require sizeable deposits, typically of at least 10 per cent of the purchase price, and are more choosy about whom they do business with. This is having an impact across the market, but particularly on first-time buyers.

Around half of all homeowners have a mortgage of 25 per cent or less of the value of their properties, which has enabled people to move without difficulty. However, there is insufficient demand for new property from these homeowners to drive the market back up.

Hometrack predicts that there will be less than 800,000 house sales this year, which equates to the average household moving once every 25 years.

Other headwinds remain too. "While economic growth is expected to pick up in 2010, rising unemployment and slow growth in household incomes is set to act as a drag on demand," Mr Donnell said. "The new year will also see a growing focus on the election and further speculation over possible changes to fiscal policies and government spending. On the basis of the economic outlook and market evidence we believe it is unlikely that the improved market conditions of 2009 will be replicated in the new year."

That assessment is broadly in line with many other commentators. Economists such as Kate Barker, a former Monetary Policy Committee member, have warned in recent weeks that the housing market has recovered too quickly for the gains to be sustainable.