House prices driven lower for the first time in almost a year

Property prices strengthened last year, but the latest signs are that the revival is losing momentum. A shortage of finance may make things worse, says Sean O'Grady

Saturday 27 February 2010 01:00

The 1 per cent fall in house prices recorded by the Nationwide in February brings to an end the 10-month-long trend that left house prices in 2009 some 5.9 per cent higher than they were at the beginning of the year. Bad news for homeowners; better for the first-time buyers who remain locked out of the market by still-high valuations and picky lenders. Things may be about to get a little easier for them.

Because the decline in February last year was so abrupt, the improvement in prices in the year to this February is still up on the previous month – 9.2 per cent, from 8.6 per cent – but the steadily improving trend has clearly been slowing, and may well go into further reverse this year.

One conundrum is that the Land Registry (which tracks all prices, not merely those with a mortgage attached as in the Nationwide data) said there was a 2.1 per cent jump in values from December to January. Yet that may simply be the after-effects of the December boomlet, and most analysts expect prices to stabilise from now on, and perhaps soften a good deal.

How many house buyers will trust the economists' consensus is debatable. At the end of 2007 the general view was that prices in 2008 would be broadly flat; they dropped by 15.9 per cent, on the Nationwide's figures. At the end of 2008 the view was that prices might have another 10 or 20 per cent to fall; they rose instead. Little wonder, perhaps that the Council of Mortgage Lenders has stopped predicting price movements, and most policymakers avoid doing so.

Not so Kate Barker, an external member of the Bank of England's Monetary Policy Committee and the author of two government-sponsored reports on the property market. Her view, expressed to MPs on the Treasury Select Committee last week, was that "there are still adjustments to come in the housing market". She added: "It seems more likely than not to me that mortgage finance is clearly not going to be available going forward on the terms it used to be... I was rather surprised by the strength of prices in the housing market through last year and it's possible some people delayed decisions to move or put houses on the market. In some sense that can't continue."

The proximate cause of the weakening in the housing market at the beginning of this year is simply that December was so strong, as first-time buyers rushed to take advantage of the stamp duty holiday before it ended on 1 January. The temporary abolition of stamp duty on homes costing up to £175,000 was an especial boon in the north of the country, and for those starting their journey up the housing ladder, and was responsible for a jump in mortgage approvals towards the end of the year. That effect has now gone, and mortgage approvals dropped to fresh lows in January – gross mortgage advances dropped below £10bn for the first time since November 2000.

But the tax break announced by the Chancellor in the 2008 pre-Budget report was not responsible for all of the strength in real-estate values last year, which was greatest in higher-end areas of London. One major factor routinely cited by market professionals is "shortage of supply", leading to a chronically thin, opaque market.

Estate agents say that a general lack of confidence about the economy prevented people from moving, and those with little or no equity in their properties were especially immobile. On the demand side, the Bank of England's policy of quantitative easing – pumping £200bn into the economy – and slashing the Bank rate to a 315-year low of 0.5 per cent helped to loosen mortgage finance – but mortgage rates remained high relative to inflation, as well as earnings growth and to house price inflation. Indeed, towards the end of 2009 some mortgage rates began to creep up again.

According to the Bank of England and much other evidence, the banks and building societies continued to demand large deposits and excellent credit records before they would lend, and even then only on conservative multiples of salary. The credit crunch has eased; but it has not disappeared. There was also some opportunistic buying – by wealthy foreigners attracted by the devalued pound that pushed UK property down by a total of 40 per cent from 2007 peaks. Buy-to-let investors taking a second look at yields may also have underpinned prices. These effects may also not be sustained.

Which is what makes the remarks by the Governor of the Bank of England, Mervyn King, about the withdrawal of Bank support to the banks over the next few years even more menacing. By the time the Special Liquidity Scheme finally expires in 2012, almost £200bn in official – and cheap – funding for the banks and building societies will be abolished with it, and Mr King has made it abundantly clear that it will not be extended or replaced. Other asset guarantee schemes operated by the Treasury may also be wound up.

Yet there is little sign that the other sources of funding that inflated the housing bubble are returning. Securitisation of mortgage books has barely been re-established, wholesale money markets are still reliant on state support, and there is little sign of the foreign banks returning to fill the gaps left behind by the busted Icelandic and Irish lenders who made such a splash in the good times. The banks will also be required to hold much higher cushions of capital by regulators, and their borrowings – leverage – will also be more tightly restricted.

The upshot of all that – and the normalisation of monetary policy that will probably happen next year – is a drift to higher mortgage rates and an even more constrained supply of mortgage finance. And that, surely, means depressed prices.

According to the laws of supply and demand, then, the prospects seem gloomy, once the current shortage of supply wears itself out as more householders are forced into selling because they, or their lenders, can delay no longer. That, in the UK, may be a more important factor than the drying up of new build supply, which has been dramatic, but is a less important source of property than in the roomier expanses of the US, say. The crisis in the eurozone – our largest trading partner – threatens to throttle Europe's fragile recovery – and will damage the UK too. Consumer confidence, hitherto ameliorating, has been eroded by talk of fiscal crises and swingeing tax rises and public spending cuts.

When the next government does start to make serious cuts in the public sector, unemployment seems certain to rise again, and the dreaded "double dip" recession may arrive, despite the upgrade in growth at the end of 2009 announced by the ONS yesterday. More than anything though, home buyers of all ages and types need the banks and building societies to offer funds to secure an appreciation in values. There is every sign that the mortgage shortage could all too easily still turn into a famine.

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