It’s a bit like love and marriage, or even a horse and carriage. House prices fall, property market experts tell us not to fret. Bad news and hype on house prices – they just go together.
This morning the Nationwide announced a 0.5 per cent fall in house prices on last month. It has now announced falls four months in a row – and has annual house price inflation at 2.7 per cent. It now has average house prices at the same level as last August, and bear in mind the first half of the year saw big rises in prices, so it will only take a few more falls and then the annual data will go negative.
So that sounds pretty worrying. With data like that you just know the Nationwide is going to make some bullish comment, and sure enough, this morning it obliged.
“The trend in prices is clearly weakening, but the size of the drop in the annual rate between January and February perhaps overstates the rate of cooling as it partly reflects the particularly strong increase in prices in February last year. The 3-month on 3-month rate of price growth rate fell to -1 per cent in February, down from -0.4 per cent the previous month. The average price of a typical property now stands at £179,358, an increase of £4,653, or £12.75 per day, over the last 12 months,” said Fionnuala Earley, Nationwide’s Chief Economist.
She added, “Economic growth is expected to fall below trend this year, but the Bank of England’s analysis suggests a recession is very unlikely, even with more hawkish interest rate assumptions than those held by the market.” Indeed, MPC member Andrew Sentance put his view more forcefully in a speech last week by saying that ‘an outright recession…is a remote risk for the UK economy’.
MS Earley added “The performance of the economy is highly relevant for the fortunes of the housing market. A brief glance at the relationship over the last twenty or so years makes this abundantly clear. So while there are several factors which are slowing housing market demand, from poor affordability to weakening house price growth expectations to tighter credit conditions, the fact that an economic recession in the UK seems unlikely provides some support for the overall health of the housing market.“
She went on, “Indeed, comparison with the US market, where house prices are falling rapidly, is instructive. Taking the average stock per surveyor figure and dividing by the average sales per surveyor should give a rough measure of the number of months required to clear the existing stock of property at the existing rate of sales. A similar measure in the US leapt in the last two years and is consistent with the 10% annual house price fall in the US in 2007. In the UK, it has been edging up but is not at levels that have been consistent with systematic falls in prices in the past. Even if demand remains at current low levels, if fewer new sellers decide to market their properties in the UK, as was the case in January, the upturn in the UK measure should also slow.”
Well, she may be right. But then bear in mind that banks are making it much tougher to borrow money. As was revealed here yesterday, in 2005 no less than 17 per cent of loans were for mortgages that carried a four-to-one or higher income ratio, compared to just 5 in 2003 and 4 in 1990.
Capital Economics said that if income multiples had stayed at their long-run average since 2003, average house prices would be around 13 per cent lower than they are currently.
It seems reasonable to assume that lending multiples are either set to return to their long-run average, or may even go under the average for a while. Clearly this will have a massively-adverse effect on the market.
As for the argument that house prices only go down in a recession, this is getting cause and effect mixed up. Falls in house prices can cause a recession.
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