House prices continue to fall

Falling house of cards

House prices continued to fall in January, with Nationwide reporting a 1.3% fall in values during the month.

The latest fall means property prices are now 16.6% lower than this time last year, and with the UK now in a recession and banks still restricting their lending, there is no sign the situation will improve anytime soon.

Martin Gahbauer, senior economist at Nationwide, says January’s decline leaves the average price of a typical house at £150,501.

Nationwide also reports that the three-month rate of house price falls to January indicates a slight softening in falls, but Gahbauer warns that it is too early to say whether this marks the start of recovery.

When will prices stabilise?

There are some positive signs occuring in the housing market. 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 first two weeks of January than during any full month in 2008.

But despite this evidence, activity levels remain “very low”, says Nationwide - mainly as a result of the 'mortgage drought'.

Gahbauer says: “Mortgages have become less widely available as a result of heightened economic risk, tighter lending criteria and a decline in the number of lenders who are active in the market.”

But a lack of mortgage credit is not the only reason for diminished house sales. Gahbauer says higher buyer enquiries have not translated into higher approvals partly because the uncertain economic outlook continues to dampen consumer confidence. Meanwhile, high inflation continues to stretch household budgets while historically low interest rates eat into people's savings.

“The fact that house prices still remain high relative to earnings reinforces this more cautious approach among potential buyers,” he adds.

The Bank of England’s repeated base rate cuts along with the government’s latest bail-out of the mortgage market have yet to have a significant impact on lending. But Nationwide says that the increasing number of buyer enquiries suggest that activity levels have a “reasonable chance” of recovering once an end to the recession is in sight and/or government interventions lead to an improvement in the availability of mortgages.

Gahbauer says: “While the [base] rate cuts have so far not had an immediate impact on economic output, this should come as no surprise. Historical experience suggests that interest rate cuts typically take 18-24 months to feed through into the wider economy, so it is certainly still too early to claim that they are having no effect.”

Ed Stansfield, property economist at Capital Economics, says house prices are still overvalued and must come down - potentially by 35% below their October 2007 peak. And despite reports of increased levels of buyer interest, Stansfield warns that prices are not about to stabilise.

"The rise in new buyer enquiries has yet to be replicated in other measures of housing market activity, while lenders are still reluctant to lend to any but the most credit worthy borrowers," he adds.