Fears grow of double dip for UK housing market
House prices fell back 1.5 per cent in February, the Halifax reveals
The housing market seems set to undergo its own "double-dip" recession, with Halifax announcing yesterday that there was a 1.5 per cent fall in house prices between January and February, and with the slow economic recovery now on course to depress sentiment for the rest of the year.
The Halifax number follows the 1 per cent drop in values registered by the Nationwide in January, and will be especially disappointing for home owners because it cannot be seen as simply a reflection of the temporary strength of the market in December being corrected the following month.
Mortgage advances and prices rose strongly in the last weeks of 2009 as first-time buyers rushed to take advantage of the stamp-duty holiday before it ended on New Year's Day. Thus, December "borrowed" some of the buoyancy that might normally have shown through at the start of this year, leaving January looking anaemic.
Analysts believe that the price correction now is more fundamental and a result of a rise in the supply of properties coming on to the market. An artificial shortage of supply last year – because of the thin market and owners' unwillingness to crystallise losses – seems to have been responsible for much of the house price boomlet then.
The easing of mortgage rates after the cut in Bank Rate to a 315-year low of 0.5 per cent last March, and the Bank of England's £200bn injection of money into the economy, also helped to underpin real-estate values in 2009; few expect a similar stimulus to arrive this year.
The Halifax said that the fall in house prices was the first the bank had noted since June last year, leaving the average house worth £166,587 – still 8 per cent above its April 2009 nadir. It follows a gradual slowing in the rate of price increases seen in the last months of last year, notwithstanding the December spike in activity.
Many observers believe that the squeeze on household budgets due this year – as tax rises come into effect, unemployment creeps higher and interest rates start to return to more normal levels – will bear down heavily on the housing market. There is also little sign that the banks and building societies will be able to repair the £200bn hole that will be left when official support measures, such as the Bank of England's Special Liquidity Scheme, are removed by 2012.
"The housing market recovery was already losing steam in late 2009, consistent with our views that it remains overvalued," said Ed Stansfield, the chief property economist at Capital Economics. "Meanwhile, recent news from the rest of the economy, and the labour market in particular, has been mixed. And, although marginal, the short-term supply and demand imbalance in the market does appear to have eased in the past two to three months.
"The house-price recovery has run far ahead of the economic fundamentals. As such, the Halifax price fall may ultimately be an early sign that last year's house-price recovery is beginning to unwind."
Others closer to the property scene were more optimistic. "The underlying trend remains more positive than recent headline numbers would suggest," said Simon Rubinsohn, chief economist at the Royal Institution for Chartered Surveyors."Indeed, the monthly level of sales should rebound in the coming months and may well end the year nearer to 70,000 rather the 60,000 area recorded at the back end of last year."
However, Mr Rubinsohn warned the market would become "gradually more challenging", echoing the fears of other housing market professionals.
Back to boring: Bank of England keeps rates and QE on hold
The Bank of England "went back to boring" yesterday, analysts said, with no change in Bank Rate, which has now stood at 0.5 per cent for a year, or any resumption of quantitative easing (QE), the injection of money directly into the economy.
Downbeat news from the housing market has balanced more optimistic noises on jobs and consumer confidence, to leave economic news broadly where it was when the Bank issued its Inflation Report last month. There is also the suspicion that the Bank will wish to avoid making any changes in policy during this politically sensitive period, although the Governor, Mervyn King, said last month that he was ready to resume QE if it became necessary.
The CBI said the Bank should remain "ready to continue" with QE, should the UK economy take a turn for the worse. Capital Economics, the think-tank, said it believed the country would still be mired in recession had the programme not been followed, attributing a boost of 2 to 3 per cent of GDP to QE.
However, Colin Ellis, an economist at Daiwa, said: "Mervyn King got his wish today – monetary policy is officially boring again. Barring major shocks, and given the Inflation Report schedule, the next key policy meeting could now be August."
More dramatic was the announcement by the European Central Bank president, Jean-Claude Trichet, that the ECB is "phasing out" some of the emergency liquidity support measures introduced over the last two years. While the benchmark interest rate remains unchanged at 1 per cent, a record low, other changes were made. The ECB has tightened the terms of its regular three-month market operations and returned to the pre-crisis practice of offering the funds at a variable rate as it winds down support.
Mr Trichet urged observers not to read too much into the changes: "There should be no interpretation in terms of monetary policy stance of what we are doing in this gradual and timely unwinding."
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