House prices fell 2.5 per cent in December, says the Nationwide; that’s the second-highest monthly fall reported yet by the building society during the current slowdown. The Halifax, on the other hand, reported a 2.2 per cent drop in December, making it merely the fifth-worst monthly drop over the last 12 months. Meanwhile, Hometrack has prices down 0.9 per cent, also the fifth-biggest monthly drop seen during this cycle.
Interestingly, if you take the average of the three surveys, then you find the December fall comes in at 1.866 per cent – and that is the highest monthly average recorded so far.
All in all, then, you could be forgiven for assuming the housing downturn is pretty much in top gear.
Surprisingly, though, some of the economists in the know – that’s to say, the people at the Nationwide and Halifax – think there is reason for optimism.
“A number of factors will help to support demand and should help to limit the downturn,” said Martin Ellis, chief economist at the Halifax. He continued his bullish note by saying: “Improving housing affordability and an easing in the pressure on the majority of households’ finances should support market activity and prices. The house price to earnings ratio – a key affordability measure – is at its lowest for five and a half years.”
Meanwhile, the Nationwide’s Fionnuala Earley pointed out this morning on Radio 4’s Today programme that the trend is improving. Over the last three months prices have fallen by 4.2 per cent, whereas the three-monthly fall in November was 4.9, and the month before that it was 5.0. In fact November saw the smallest three-monthly fall since May last year.
However, take a closer look, and the optimism – if indeed you call it optimism (there are those who want to see house prices fall) – does not look quite so justified.
Sure, the Nationwide’s three-monthly trend fall is down, but you must be careful when looking at data. When you have a string of numbers, the law of averages says they vary. The fact is that over the last six months the three-monthly fall has ranged from 5.1 to 4.2 per cent – that seems pretty consistent. The Nationwide did actually report a mere 0.4 per cent drop in prices in November, the lowest monthly drop in the whole of 2008. The key really lies in determining whether the November fall proves typical, or whether it was a glitch in the data. And there will be no way of answering that for several more months.
As for the Halifax’s claim that we are seeing the ratio of average house prices to average salary fall to a level which is close to the historical average, this needs closer examination.
The long term average for this ratio is 4 (the Halifax refers to this as the price earnings ratio, by the way). Currently the ratio stands at 4.44, which would suggest another 10 per cent fall will see the rate fall to its average level.
But then again, the ratio fell to just 3.1 in 1995. So this would suggest prices need to fall by around 24 per cent from the current level just for the ratio of average prices to average wages to fall to the same level it reached in the last cycle.
There is of course an argument to be made to say that as this slowdown seems to be worse, the ratio may fall by slightly more than that this time. It is also quite important to bear in mind the price earnings ratio stayed below 3.5 for the rest of the 1990s. So if this cycle is anything like the last one, you should expect the ratio to fall by around 24 per cent, and for prices to stay at around that level for about ten years.
Don’t forget, however, wage inflation is much more modest today, so a fall in the Halifax price earnings ratio will mean a bigger fall in house prices than we saw in the 1990s.
But before we leave this point, it is also interesting to note that this historical average which the Halifax refers to, does itself vary. Right now, just 12 months after prices peaked, the historical average for this price earnings ratio is quite high. Actually, according to our quick analysis of Halifax data, even the historical average has varied between a range of 4.1 and 3.5 over the last two decades.
Hi
You say “Surprisingly, though, some of the economists in the know – that’s to say, the people at the Nationwide and Halifax – think there is reason for optimism.”
These people aren’t “economists in the know” they are economists working for vested interests.
I’m glad you go on to question their optimism. All too often, the BBC and the like question economists from Haliwide or RICS as if they are independent experts and not vested interests.
HI,
These economists have been saying the same thing for 18 months and I suggest one looks at the high street where the estate agents are culling staff, closing offices and basically not busy. If prices in ireland and Spain are down 30% and the same economic conditions exist in the Uk then the optimists will be in for a shock.