David Prosser: The biggest house price falls are now behind us

Outlook While revealing there was another small fall in house prices last month, the Nationwide Building Society pointed out yesterday that it has now been exactly three years since the market peaked. To mark that anniversary, Nationwide plotted some charts to compare this downturn with the last significant correction in the early Nineties.

They show that while the first 18 months of the current phase of falling prices tracked the experience of the early Nineties almost identically, the past 18 months has seen a far gentler decline, with even some modest rebounds on occasion. That reflects the historically low interest rates we have seen over the past two years. While the number of house purchases in the current downturn has collapsed – to even lower levels than in the 1990s – sellers have been able to change their plans to fit the lack of demand. Low interest rates have meant only a small minority of mortgage borrowers have been forced to try to sell. Other would-be sellers have had the option of holding fire, and supply and demand have evened out.

With lending still constrained and an economic recovery that looks patchy at best, it is difficult to see the number of house-buyers increasing any time soon. But the fact that there is also little prospect of higher interest rates, should leave demand and supply in equilibrium. That's good news for those who hope the housing market does not have much further to fall.

Other indicators give mixed signals. The ratio between the value of the typical property and average earnings remains high at about 5.5, compared with a long-term average of 4, which suggests that getting on to the housing ladder remains as difficult as ever, and also that prices have further to fall. On the other hand, the housing market now appears to have returned to its long-run trend of price appreciation.

Barring any new shocks, then, it seems wise to plan for another year of flat or very gently declining prices in 2011 – and not for a return to the drama of the housing market collapse of 20 years ago.