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Recovery position

House prices have been falling since last October, according to Nationwide’s house price index. They have declined every month since and are now 9 per cent off the peak.

There is little sign of confidence returning to consumers and until that happens, prices will not recover.

However, there is plenty of pent-up demand and hence potential for recovery when confidence returns, provided that adequate mortgage finance is available. This latter point is likely to restrict the recovery significantly because when many first-time buyers and buy-to-let investors decide the time is right to buy, they will not qualify for the advance they need.

However, when the market stabilises, institutional investors will regain some confidence which should increase the wholesale funding available to the market. The question is what will cause the market to stabilise while mortgage availability is still seriously constrained? The answer is a sufficiently big fall in interest rates.

I was at a meeting last week with Paul Tucker, a Bank of England director and member of the monetary policy committee, organised by the Association of Mortgage Intermediaries.

It is no secret that the oil price is a key influence in the bank’s thinking on inflation and hence interest rate policy. The more the economy weakens, the quicker the MPC will resume cutting rates. If commodity prices continue to fall back, the next cut could be this year.

A sharply weakening economy will in the short term be good for the property market, provided that unemployment does not rise too much, as it will bring forward the timing of rate cuts and increase their likely scale. I expect the base rate to fall to around 4 per cent by the end of next year and even if the base rate/Libor spread remains elevated, Libor is likely to follow the base rate down. With a 4 per cent base rate, assuming money market conditions do not improve, the effect on mortgage rates would be similar to a 4.75 per cent base rate in more normal conditions.

An effective 1 per cent base rate cut from last year’s peak and property prices on average, say, 15 per cent off the peak, will have a very positive impact on affordability and should encourage enough buyers to stabilise the market. Once that happens, more cautious buyers will enter. The speed of decline in national indices is significantly greater than in the late 1980s and early 1990s, partly because prices are already falling throughout the whole of the UK, whereas in the previous downturn there was a significant time lag before the ripple effect of price falls in the South-east reached the rest of the UK, particularly Scotland.

This suggests that the timescale for this bear market will be much shorter than the average three years of previous bear markets and prices will bottom out by the middle of next year. Activity will then increase and some lenders which have exited the 95 per cent loan to value market will be tempted back in although I do not expect to see 100 per cent mortgages reappear next year.

Ray Boulger is senior technical manager at John Charcol

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