March 28, 2008 | posted by Michael Baxter in House prices |

So it’s five months in a row.  The Nationwide now has monthly house price inflation in negative territory for five successive months.    It has recorded annual house price inflation at just 1.1 per cent, the lowest level in 12 years, and now has house prices at the lowest level since last April.

Intriguingly, the Nationwide seems to have changed its tune slightly, but is not admitting it.   “Some of the downside risks we identified …[previously]… have become a reality,” it said, and added “however, the path for house prices in 2008 still looks set to remain within our forecast range. We expect a modest fall in house prices during the year.”

The Nationwide has not predicted a fall in house prices for a very long time – and although it is emphasising words like ‘modest,’ and saying its latest forecast is compatible with previous forecasts, because in the past it warned of downsides to its projections, it is nevertheless quite an admission.

Mind you, it is quite curious that it is talking about only modest falls.    Of course, modest is a relative term. Given that house prices have risen by 198 per cent since 1997 (according to the Nationwide), presumably a fall of 30 per cent could be described as modest.

The Nationwide itself carries out consumer confidence surveys, and its latest findings are that consumers who were willing to quantify their expectation, on average, expect an annual fall in house prices of around 3 per cent  in six months’ time.   The Building Society’s Chief Economist Fionnuala Earley said, “If prices were to fall in line with consumers’ expectations, they would still be higher than two years ago. A moderate fall in prices at this stage should not be unwelcome and should help to ensure greater stability in the market going forward.”

So while it denies it has changed its mind, it seems to be suggesting a fall of 3 per cent is both modest and would be welcome.  Now that’s interesting, because Capital Economics  is considered to be an arch bear of this market, and it expects prices to fall by 5 per cent this year.  

More interestingly still, Capital Economics reckons 2009 will be worse.   And quite frankly, we think they are right.  If the UK is lagging a year behind the US, then 2009 will correlate to 2008 in the US.  So if even the Nationwide is now contemplating a 3 per cent fall this year, then the omens for 2009 are not good.

But perhaps even more light can be shone on to the property market’s less-than-gleaming surface, it we take a gander at the latest report from the British Bankers Association.

Mortgage approvals for house purchase came to 43,870 in February.  They have been lower, last month 43,732 were approved, and the month before that just 42,189, but that’s it.  The BBA data we have access to goes back to September 1997, and there have been no other occasions during that period when mortgage approvals for house purchase have been lower.

If you look at re-mortgages, it is another story.  In fact, January saw the highest number of re-mortgages since 2003, and while February saw a fall – from 79,926 to 72,193, it was nevertheless a busy month.

There are no prizes for guessing why.    It’s those mortgage re-sets. You may recall, 1.4 million people are due to come off fixed rate mortgages this year, and this important movement is showing up in the data already.

This is made all the more significant when you see this news in the light of announcements yesterday from both the Nationwide and Halifax.  The Bank of England recently lowered rates, and it is widely thought it will lower them again, and yet, yesterday, the Nationwide increased the interest on its tracker mortgage by 0.57 per cent, Halifax subsidiary if.com upped one of its rates by half a per cent and First Direct withdrew one of its cheaper mortgage packages.

Perhaps the most telling comment sat in the headline in The Times.     “Nationwide and Halifax put up mortgage rate to deter new customers.”

The real key to all this, though, surely relates to something the Nationwide said.   “The overall impact this will have on the housing market will depend on how much consumers think that prices will change,” said their Ms Earley.

The idea that house prices only ever go up is deeply embedded into the British mentality.  The realization that prices can fall too will only dawn upon people slowly.    The danger has to be, however, that eventually the British public will overreact.  As we told yesterday, overreaction from the individuals involved is about the one thing all economic cycles, booms and crashes have in common.

The real danger sits with buy-to-let investing.    A recent report from the Halifax found that the average total return for a buy-to-let investor was 16.3 per cent in the year to December 2007.  Of that return, 5.4 per cent came in the form of yield.   

Now, let’s assume that voids, agent fees, and maintenance costs come to, say, 1 per cent of a property’s value.     If Capital Economics is right, and house prices fall by 5 per cent this year, then buy-to-let investing, even for investors who don’t even have a mortgage, will make a loss.

In an environment in which demand for properties is low, it will only take a small rise in supply to tip the market over the edge.  If some buy-to-let investors conclude that house prices are likely to fall, and that their business will make a loss for a couple of years, they may well be tempted to liquidate. 

This could in turn lead to even bigger falls, creating even less confidence.    Capital Economics’ projections of 8 per cent falls next year could end up looking like naive optimism.