The housing slump: fact or fiction?

Kate O’Raghallaigh looks at what’s on the horizon for the property market

 

Recent press coverage of house prices has been particularly depressing, heralding the return of negative equity, bemoaning the plight of the deposit-less first time buyer and predicting a housing slump similar to that of the early 1990s.

 

But the focus has been very much on house price data drawn from two main sources – UK lenders Halifax and Nationwide – whose figures often differ. According to Halifax, UK house prices fell by 2.5% in March to £191,556, marking an annual fall of 1.1%. Nationwide’s figures recorded a 0.6% fall since February to £179,110. Looking at the annual change, however, both lenders agreed that growth had slowed to 1.1% by March 2008, from 9.3% in March 2007 (Nationwide) and 11.1% (Halifax).

 

The fact that the monthly figures differ, however, doesn’t mean that one source is more accurate than the other. Both Halifax and Nationwide compile their data using their own lending figures, so, invariably, as the numbers and kinds of properties that lenders have on their books will vary, so too will any data that is based on those properties.

 

However, recent figures from the Council of Mortgage Lenders only served to reinforce the current gloom surrounding the mortgage and property markets. It revealed a 17% fall in gross mortgage lending since March 2007. These figures reinforce the decline in the number of people getting approved for a mortgage. According to the Bank of England, an estimated 73,000 people were approved for a mortgage in February, marking a 25% decrease since September 2007 and a 40% decrease since November 2006.

 

Demystifying the figures

 

But what do the figures really mean – are the scaremongering headlines correct, or are they unduly pessimistic? Peter Bolton King, spokesperson for the National Association of Estate Agents, says: “The global credit crunch, squeeze on mortgage approvals and the media cloud that currently surrounds the property market are undoubtedly having effect on people’s decision to buy or sell in the market.

 

“However, the situation is not as bad as it seems. Many NAEA agents are reporting stable and, in some cases, strong property markets with many of their branches meeting targets and beyond. The market is unlikely to stay down for long as the factors that underpin the housing market – traditionally low interest rates, high employment and demand are still strong.”

 

Negative equity

 

Figures showing falling house prices and fewer mortgage approvals have also resulted in talk of negative equity. This is when the value of your property falls below the amount you have borrowed from your mortgage lender. Although this is a possibility for some homeowners – especially those who have taken out a 100% or 100% plus mortgage in recent years – the situation isn’t nearly as dire as that of the early 1990s.

 

According to Ed Stansfield, property economist at Capital Economics, the housing slump of the 1990s saw a lot more people in negative equity than the current market conditions are likely to produce. He says: “The market then was full of people who had borrowed more than 100% LTV; something like 40-45% took out 100% mortgages, compared to the 10-15% in the current market.”

 

Time for a correction?

 

Stansfield does, however, feel that the property market will experience some setbacks in terms of falling prices, considering the price boom of the past decade. He believes that a market correction was long overdue. “The outlook for the housing market is extremely poor over the next few months and every day brings with it further evidence to support this. We expect house prices to fall between 10 and 15% over the next two years,” he warns.

 

Halifax and Nationwide, on the other hand, have a slightly more optimistic view of the market Martin Ellis, chief economist at Halifax, says: “Overall, we expect there to be a modest fall in UK house prices this year. Any declines, however, should be viewed in the context of the significant price rises over recent years.”

 

Fionnuala Earley, chief economist at Nationwide, agrees, saying that even if prices continue to fall, significant losses are unlikely to be sustained. She says: “The outlook for UK house prices is clearly more downbeat than at the time of our November forecast. Some of the downside risks we identified then have become a reality – most notably the continued turmoil in the financial markets.

 

“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, but such a fall should be seen in context. If prices were to fall in line with consumers’ expectations, they would still be higher than two years ago.”

 

And our own house price predictions (available with the May 2008 issue of Your Mortgage) show that although England will sustain house price falls in 2008, with some areas including Warwickshire and the West Midlands Metropolitan County recording declines of up to 6.4%, the value of homes across much of England will recover by 2012.

 

It remains to be seen how many people will find themselves out of pocket as a direct result of the current market conditions. While it is now more difficult to get a mortgage than it was last summer, the same rules still apply to those hoping to get on the property ladder: work out what you can comfortably afford without don’t over-stretching your finances.

 

 

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