Is a housing market recovery in sight?
House prices have been falling for more than 12 months now, with the latest Nationwide figures revealing property values were 16.6% lower in January than the same time in 2008. The latest 1.3% fall this month leaves the average price of a typical house at £150,501.
However, conflicting figures from Halifax suggest that house prices actually rose in January by 1.9%, the first increase in values for 15 months. Despite the monthly jump, Martin Ellis, housing economist at Halifax, says people shouldn’t put too much weight on January’s rise.
Over the three months to January 2009 prices still fell 5.1% and, historically, house prices have not moved in the same direction month-after-month even during a pronounced downturn. For example, Ellis says that prices fell for seven successive months in 1989 but subsequently increased in three of the first 10 months in 1990.
While falling house prices are a concern for existing homeowners, they represent an opportunity for first-time buyers or those looking to buy. The Royal Institute of Chartered Surveyors (RICS) reported a 17% increase in new buyer enquiries at the end of last year, as consumers went in search of bargain opportunities.
And property website Globrix says it saw more searches in the first two weeks of January than during any full month in 2008 as a result of a 111% increase in sellers lowering asking prices.
Meanwhile, figures from the Bank of England show mortgage lending increased in December from the previous month.
In January, Woolwich launched its cheapest mortgage ever. The lender, which is owned by Barclays, is offering a fixed-rate mortgage at just 2.29%. This is a full 1.5% cheaper than Woolwich’s previous fixed-rate offering, and is the lowest mortgage on the market for either tracker or fixed-rate deals.
"We are seeing some of the best mortgage rates in a generation," says Andy Gray, head of mortgages at Woolwich. "This is down to increasing competition and the falling cost of lending for the banks.”
This seems to go against what we know about the credit crunch. A lack of funding to banks has prevented lenders from offering competitive mortgage rates and forced them to tighten their criteria.
So, is all this evidence that the housing market is stabilising, and potentially even on the road to recovery?
What lies ahead?
The Nationwide house price figures for January do show a further decline in property value, but they also indicate that, on a quarterly basis, the falls appear to be slowing.
However, Martin Gahbauer, the building society’s senior economist, says it is too early to say if this marks the start of a sustained improvement. The recession, and associated rise in unemployment, as well as continued mortgage restrictions and a lack of consumer confidence, do not bode well for the future.
“A pre-condition for recovery in the housing market is an end to the deterioration in the wider economy,” says Gahbauer. “At the moment, the economic news remains downbeat, with official figures showing that the economy shrank by 1.5% in the final three months of 2008 and confirming that the UK has entered its first recession since the early 1990s.”
However, he adds that lower interest rates and the government’s second banking bail-out do provide “a path for a future recovery out of recession”.
But the road to recovery still appears to be some way off.
Seema Shah, property economist at Capital Economics, says the Bank of England’s figures showing an improvement in lending in December mean housing market activity shows signs of stabilisation.
But she adds: “The continued tightening in lending criteria and drastically weakening economy means that it is unlikely to recover to more normal levels for the foreseeable future. At current levels, mortgage approvals suggest house prices are set to decline significantly further.”
Shah believes that activity is unlikely to recover "significantly" in the coming months.
The new Woolwich mortgage does suggest that mortgage rates are coming down. But despite its low rate, the deal is not for everyone. For a start, the rate is only fixed for 12 months after which point it will revert to a variable rate and borrowers are locked in for three years. In addition, the loan is only available up to 60% loan-to-value (LTV) – which means you need a deposit of 40% to qualify.
David Hollingsworth, mortgage specialist at London & Country, says the launch is good news as it “throws down the gauntlet” to other lenders.
But he adds: “The biggest factor holding back mortgage lending is high LTV requirements. This shows no signs of coming down.”
For example, Royal Bank of Scotland recently cut its two-year fixed-rate to 3.49%. However, this is only up to 75% LTV. If you only have a 15% deposit, therefore requiring an LTV of 85%, then you would have to pay 5.49%.
“We need to see a narrowing of the difference in rates between LTV bands, and more choice for people with smaller deposits,” explains Hollingsworth.
The lack of mortgage credit means that the increased consumer appetite for property is not translating into more sales. Gahbauer says other reasons why higher buyer enquiries have not translated into higher approvals include the uncertain economic outlook and high inflation.
“The fact that house prices still remain high relative to earnings reinforces this more cautious approach among potential buyers,” he adds.
Capital Economics says house prices are still overvalued and must come down - potentially by 35% below their October 2007 peak.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.