Worst housing market in a decade, warn surveyors

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Britain's housing market is facing its worst conditions in more than a decade, according to the Royal Institution of Chartered Surveyors (Ric s). Surveyors are reporting falling prices, with February the seventh month in a row when sentiment has been negative.

The net balance of surveyors reporting falling rather than rising values climbed to 64.1 per cent in February, up from 54.8 per cent in January. This figure is only marginally higher than the historical nadir reached in June 1990. Such powerful anecdotal evidence reinforces data from the Halifax and Nationwide indices which have shown a pattern of gently declining prices.

Only Scotland is bucking the gloomy trend. Philip Shaw of Investec securities said: "Housing demand has fallen off a cliff over the past year, with no signs of an imminent stabilisation in activity, let alone a recovery."

The decline in prices is driven by a lack of demand linked to the credit crunch, rather than a jump in supply of new housing. Buyers are finding it tougher to raise mortgages. Banks and building societies have tightened up their lending criteria for fear of a rise in bad debts. They have also been "hoarding liquidity" to shore up balance sheets, and some have been badly affected by the collapse in demand for securitised mortgage-backed securities.

The Government has been hinting it may offer some kind of quality assurance ("Kitemarked securities") to unfreeze the market. Additionally, the UK's "sub-prime" lenders have disappeared. These factors have been reflected in a marked drop in mortgage approvals recently. Falling house prices will tend to exacerbate the credit crunch and could create a vicious circle.

The shortage of buyers has left a glut of unsold houses and flats. The stock of property on surveyors' books jumped by more than 8.5 percent in February, the fifth successive monthly increase of that magnitude. The ratio of sales compared to the stock of unsold property fell to 26.5 per cent, the lowest since September 1996.

Should sellers begin to panic, for example in the inflated buy-to-let sector, the current orderly retreat in the market could turn into a rout. Mr Shaw adds: "Our feeling is that when house prices fall, fewer households are willing to sell. This has a dramatic effect on turnover, but tends to limit the decline in prices. Whether this supports prices in the medium term or simply delays a bigger decline depends on whether households are forced into selling."