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Price falls mask the bigger picture

Earlier in the month, the Intern- ational Monetary Fund predicted that UK growth will slow from 3 per cent in 2007 to 1.6 per cent in both 2008 and 2009.

Its forecast is below that made by the Chancellor Alistair Darling at the time of the March Budget when he predicted growth of 1.75-2.25 per cent this year and 2.25-2.75 per cent in 2009.

The IMF cited that the weakening of the housing market in the UK was one of the reasons for the reduction in the country’s growth figures.

The latest Halifax price index repor-ted that house prices fell by 2.5 per cent in March and prices in the first quarter of the year were 1 per cent lower than in the last quarter of 2007.

The national figures, however, mask some significant regional variations. Despite price falls in some regions, a number of areas have continued to record price rises.

The biggest increases in the first quarter of 2008 were in Greater London (1.6 per cent), East Anglia (1.4 per cent) and the East Midlands (2.2 per cent).

There were house price falls in six regions, with the biggest falls in the West Midlands (-5 per cent) and Wales (-4.7 per cent). But these declines should be seen in the context of the substantial price rises recorded in these regions over the past 10 years – West Midlands (150 per cent) and Wales (188 per cent).

Nine of the 12 regions in the UK have recorded increases over the last year, with Scotland (5.3 per cent) and Northern Ireland (3.5 per cent) being the biggest.

Overall, we expect there to be a low single digit percentage decline in UK house prices this year. This modest fall follows the significant increases we have seen over the last decade. The average UK price has increased by 171 per cent to £191,556 from £70,696 over the last 10 years.

The market remains supported by sound economic fundamentals.
The economy, while slowing, remains in good health, with employment levels at a record high. Our research shows that conditions in the labour market are the key driver of what happens in the housing market. Employment stands at 29.5m and has risen by 370,000 over the past year. Unemployment is below 800,000 and has fallen by over 125,000 in the last year.

Comparing these figures with the employment trends of the late 1980s and early 1990s draws a clear line in the sand between the housing market then and now. Unemployment increased by 85 per cent in the early 1990s to 2.91 million.

High and rapidly rising unemployment combined with high interest rates forced many homeowners to sell their properties, pushing down house prices. A repeat of these conditions does not look likely under any realistic economic scenario in the foreseeable future.

When reviewing the UK housing market, it is also important to analyse supply side factors.

Historically, the level of housebuilding in the UK correlated strongly with house price movements but this relationship has broken down over the past 10 years. As the building of new homes has not picked up in the last decade, it has served to exacerbate the increases on house prices as demand has grown. We predict that, if achieved, the Government’s target of building three million new homes by 2020 will still be over half a million short of what will be required.

As the level of new household formation continues to outstrip that of housebuilding, the lack of supply will help to underpin current valuations over the medium and longer terms.

Despite recent market commentary about the negative impact that the current climate is having on borrowers, our research shows that homebuyers are in a stronger position than in the past.

Buyers have been able to put down bigger deposits than in previous years, with 82 per cent of all new borrowers putting more than 10 per cent equity into the property in the last quarter of 2007 compared with 56 per cent in 1989. The size of the first-time buyer deposit has also increased. The average FTB deposit in 2007 equa-ted to 20 per cent of the property price compared with only 12 per cent in 1989.
The household balance sheet is also in good shape. The estimated total value of private housing stock in the 2007 was 3.4 times the value if outstanding mortgage debt and total financial savings are three times higher than the current level of debt.

In conclusion, the previous significant countrywide fall in house prices in the late 1980s and early 1990s was triggered by a combination of substantial interest rate increases and rapidly rising unemployment that forced many owners to sell their homes. By contrast, in the current interest rate and housing supply climate, we do not foresee big numbers of homeowners being forced to sell their homes.

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