Fall in property prices signals risky year ahead

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The uncertain outlook for the housing market was confirmed yesterday in the latest data from Halifax.

Britain's largest mortgage lender reported a 1.3 per cent drop in house prices during December, after a 0.2 per cent decline in November. Halifax warns: "We expect limited movement in house prices during 2011 but with the risks on the downside."

Most experts are forecasting flat or modest declines in property values this year of about 5 per cent – a real terms decline of closer to 10 per cent.

The average British home is worth £163,435, down from its peak of £169,484 a year ago. The Halifax figures broadly corroborate similar trends reported by Nationwide, which indicated that prices rose marginally in December, by 0.4 per cent, having fallen by 1 per cent over the previous two months.

While monthly data from both source are volatile, the quarterly averages are similar – about 1 per cent down in the last three months of 2010, even with the benefit of the stamp duty holiday for first-time buyers and some evidence of a reviving economy.

Trends in mortgage finance are weighing heavily against home owners, though will be of some benefit to first-time buyers provided they can raise a deposit for a mortgage. The most recent Bank of England Credit Conditions Survey pointed to increasing evidence of weakening demand for home loans, while the Royal Institution of Chartered Surveyors, polling on new buyer enquiries, also suggests they are slowing.

Mortgage approvals are running at about 46,000 a month, around half the level that is usually needed to deliver a rising market, with more emphasis now on demand than the supply from banks and building societies.

Part of the demand story may simply be the fact of stagnant prices reinforcing themselves, as they offer prospective buyers space to gather finance and assess their options; it will also be due to increasing uncertainty about job cuts in the public sector and the doubts around the wider economy.

Higher inflation also threatens a move to higher interest rates by the Bank of England, where the Bank rate has been held at a 315-year low of 0.5 per cent since the spring of 2009. Short term, a shortage of "quality" property for sale may underpin prices, as was seen for a time in 2009.

Allan Monks, an economist at JP Morgan said: "We expect price declines continuing to average close to their current pace, and prices to be down by a further 3 per cent by the end of 2011."