February 13, 2008 | posted by Michael Baxter in House prices |

Maybe the Royal Institution of Chartered Surveyors (RICS) produces the most important and significant of all reports into the UK housing market. Its main headline index seems to be the most reliable indicator of what the UK housing market is doing, while it also produces a raft of other measures which seem to give a pretty good indication of where the market will be going next. And this morning the latest set of reports from RICS were out – and they were sorry indeed.

The headline index – which is produced by asking surveyors if prices were up or down in their neck of the woods during the month, and deducting the percentage number who said down from the percentage number who said up, fell to -54.7 in January; that’s the lowest level since 1992.

Now, it is important to bear in mind we have been here before – quite recently. From 2004 to 2005 the RICS index was in negative territory for 15 months, and yet it recovered – went positive in November 2005, and preceded a period of strong house price growth.

Property bulls often cite the slowdown of 2004 and 2005 as evidence of the underlying strength of the market. At the time, they said the market would see a mere slowdown and would then recover – some ridiculed this prognosis, and yet these positive projections proved to be right.

Now transpose that debate on to today’s discussion. The bulls of course point to that time and say we were right then, and the same principle applies now.

Now there is actually a fundamental flaw with that argument. The history of bubbles is riddled with examples of markets that appeared to decline, recovered, seemingly confirming the most bullish of predictions, only for the bubble then to burst later.

But putting that argument aside, it is worth taking a closer look at the 2004 and 2005 RICS data. It is true the RICS headline index was negative for 15 months, and so far it has only been in negative territory for six months – so maybe you could argue it is too early to tell.

But, there are differences. In the previous downturn, the index bottomed out at -46. This time around the RICS index has now put in lower scores than that for two months in a row.

Back in 2004, once the RICS index went negative, it posted declines for four months in succession, before starting to improve – this time, since the index first went negative there have been six months of successive falls.

It is clear then that the indicators suggest this slowdown is much worse than the last one.

But where next?

And it is in indicating what the future will bring that the RICS report paints an especially dismal picture.

For one thing, the RICS index for measuring expected prices fell to the lowest level ever recorded – or 1998, which is when RICS first started including questions about confidence in its survey.

Just as significantly, however, new buyer enquiries also fell in January. In fact, says RICS, “The pace of decline in new buyer enquiries picked up speed in January having shown some signs stabilising in preceding months. The net balance of surveyors reporting a drop in the number of new buyer enquiries now stands at 35 per cent which is the worst reading since October. That (and the September) figures had been dragged down by the fall-out from Northern Rock.”

But, perhaps most damming of all, the stock of unsold property on surveyors’ books jumped by 10.3 per cent on the month. Average stocks on surveyors’ books were 85.0 in January compared to 77.1 in December. On year-ago levels, stocks are up by 33.8 per cent, and the current level of unsold stocks is at its highest since the late 1990s.

Now you don’t need to be a mathematical genius to work out that when demand is falling and inventory levels are high, prices are likely to fall.

But woe on the housing market is not only forthcoming from RICS. Yesterday, the Council of Mortgage Lenders reported that there was a 35 per cent drop in the number of new mortgages in December, and that the last three months of 2007 saw the lowest number of new mortgages since 1995.

Yet, amazingly, the property industry still seems to think there are no major problems.

RICS spokesman, Jeremy Leaf, said, “However, if mortgage lenders filter the recent interest rate cuts into the market, demand should begin to increase. In the near term, the housing market will continue to be shielded from significant price falls while employment conditions are strong. The market need only fear a significant fall in prices if job losses start to multiply.”

CML too were celebrating the recent fall in interest rates, and its director general Michael Coogan said, “The impact of payment shock on the large numbers of borrowers coming to the end of fixed-rate mortgages will also be less than we anticipated last year.”

The property industry seems determined to do its bit in talking house prices up – but the truth is, house prices are too high, wage increases are lagging behind inflation, our discretionary disposable income actually seems to be falling – and as the US experience tells us, unemployment does not have to be high for house prices to fall.

The property industry might think they can keep prices up just by making positive comments – but the reality is, they talked prices far too high in the first place.