July 14, 2008 | posted by Michael Baxter in House prices, IABN |

Denial seems to be rife in the world of property.

Last week, the Halifax told its latest tail of woe, but at the same time put so much spin on the story, that the bank must fear its economic team could be snatched up to play cricket in the Indian Premier League any day.

The Halifax, Hometrack and Nationwide have all now released data on house prices for June.  In some ways the most spectacular drop was recorded by Hometrack.  It had prices down 1 per cent.  That may not sound that spectacular to you, but Hometrack data is typically much less volatile than data from the big two.    Frustratingly, Hometrack did not say how long it is since it has recorded a bigger monthly fall, but we have been keeping tabs on its data now since November 2003, and the month just gone saw by far the highest monthly drop in that time.

As for Halifax, it had prices down 2 per cent.  More to the point, it recorded a 5.5 per cent drop in the second quarter, easily the biggest quarterly fall it has ever recorded.   It now has average house prices down by 9 per cent from last August’s peak.

Yet still we hear reasons why the housing market is in fine shape, really.

“The housing market continues to be underpinned by sound fundamentals. All our research indicates that the labour market is the key driver of the housing market. Employment is at a record high of 29.55 million.  Total employment increased by 76,000 over the three months to April compared with the previous quarter and by 446,000 over the past year,” said the Halifax.

Meanwhile, the Royal Institution of Chartered Surveyors stuck to that line that falling house prices won’t help first time buyers. David Stubbs, senior economist at RICS said, “Access to the housing market has deteriorated as the credit crunch has taken hold of the mortgage lending sector…With mortgage approvals declining, the picture does not look like improving in the latter part of 2008, and first-time buyers will find their path to home ownership increasingly blocked.”

And still the property bulls say it is all just down to the credit crunch.   House prices are falling because of a shortage of credit.  It has nothing to do with prices being too high in the first place.      Although, to give Halifax some credit, it did talk about a “squeeze on spending power” and  “affordability difficulties due to the rapid rise in house prices in the last few years.”

But the bulls miss the point.  It was surging house prices that encouraged lending in the first place.  We are also told that first time buyers are being hit especially hard by the credit crunch.  That for as long as credit is tight, they won‘t be able to get back on.

Yet, consider this.    First time buyer numbers have been falling steadily for years.     According to data from the Council of Mortgage Lenders, the total number of loans to first time buyers in 2007 was at its lowest level since 1991.   For that matter, the five years from 2003 to 2007 saw the lowest number of loans to first time buyers over any five-year period since the 1970s.

Okay, first time buyer mortgage numbers have fallen even lower since then.  May saw 19,200 first time buyer mortgages, compared to 32,800 in May 2007.  The first quarter of this year saw 53,200 mortgages for first time buyers, compared to 84,000 in Q1 2007.  But then again, in the third quarter of 2001 the number was 167,000.

What we are really seeing in 2008, is the continuation of a trend seen for several years. House prices were propped up by buy-to-let investors.     As was told here last week, a new breed of amateur landlords is being created, as people who can not sell their home, but have to move, are being forced to let it out.

There is also a glut of unsold two bedroom flats for sale – precisely the properties that were supposed to be required to meet the demographic shift which was supposed to be pushing prices up. So, whereas the bulls say buy-to-let investors will move in and push prices up as high rents make it more profitable for them, in fact it is far from certain this will mean higher rents in the longer-term at all.

It seems far more likely that more and more buy-to-let investors will sell.    This will push prices down further as we see the opposite of the mad speculative bubble that pushed prices up in the first place, push prices down too low.

When Barratt/Taylor Wimpey/Persimmon and Co start selling off their city flats at rock bottom prices to clear their books, landlords with spare cash will clean up.   What they won’t be able to do, however,  is charge extortionate rents – they will charge a decent rent based on what they paid for the flats plus a bit more for profit.

If this happens, then all those other buy-to-let landlords out there will struggle to keep rents up at a high level, making their investments even less attractive.

It is possible that the glut of properties left over on house builders’ books might serve to keep rents down and further damage the market.

The market will hit bottom when prices are so low, that rental yield makes buy-to-let irresistible,  even if prices are falling.  Prices will also fall to a level that will make it practical for someone on an average salary to save up a 10 per cent deposit for an average property.  This will occur when average house prices are around three times average salary.    In April, the Halifax recorded an average house price to average wage for full time male employees of 5.43.

But, the inevitable fall in house prices is not bad news, at least not in the longer-term.  Sure, it will hit an economy which finds it can no longer grow through consumer borrowing.  But in the longer-term this will create an economy that hinges on sustainable factors.

Above all, we will see the end of the myth that house prices always go up.  As this myth is finally, and once and for all, proved to be false, maybe people will start grappling with more serious problems, such as the impending pension time bomb, and we may, at last, see saving levels rise.