Confidence is key to housing recovery

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The housing market can not recover until consumer confidence does, with house prices likely to continue falling for the rest of 2009 and beyond, experts have warned.

The latest house price index from Nationwide shows that house prices fell by a further 0.4% during April, leaving the average property worth £151,861 – 15% less than 12 months ago.

Despite a slight rise in prices in March, this month has seen another decline across the housing market. Commentators say it is not unusual for house prices to rise one month and fall the next during a depressed market.

David Smith, senior partner at Dreweatt Neate estate agents, explains: "A sideways-moving market like this, with the odd blip up or down, is how things look set to continue given the highly uncertain economic climate.”

A more accurate measure of the health of the property market is the inflation, or delfation, of prices on a three-month basis. Nationwide reports that between February and April, prices fell by 3.1% compared to 4.1% between January and March – suggesting falls are stabilising slightly.

April’s figures do not reflect measures announced in the Budget to help kick-start the mortgage market, including government plans to help lenders sell on their mortgage debt to investors.

Such a move should help banks free up funds and increase the amount they lend to consumers. With the availability of new mortgages still restricted – with the most competitive loans reserved for people with large deposits – the government hopes that increased mortgage lending will help more people get on the property ladder and gradually slow down and reverse house price falls.

However, Fionnuala Earley, chief economist at Nationwide, casts doubt over how effective such a scheme will be as mortgage availability is not the only barrier to recovery.
“Since the availability of credit is only part of the reason why the housing market is in the doldrums [the government’s plans are] unlikely to lead to a swift turnaround in its fortunes," she explains.

"Lenders have already indicated that the availability of credit is less of an issue than it has been, but at the same time expect that the demand for secured lending will fall further.

“Given the weakness of the economy and the expected further increase in unemployment this comes as no surprise.”  

There has been a reported rise in interest among buyers in recent months, and house sales have also picked up. But experts point out both buyer interest and sales remain significantly below levels seen in the past.

Ed Stansfield, property economist at Capital Economics, says: “Although the recent upturn in buyer interest may encourage sellers to hold out for higher prices, thus slowing the rate of house price falls over the next few months, ultimately the combined effect of rising unemployment and widespread pay freezes will mean that prices fall considerably further.” 

He adds that house prices have not yet bottomed, and will continue to fall until mortgage credit becomes much more freely available and the recession has run its course – “something we don’t expect to see before the second half of next year”.

Smith adds: “Consumer confidence is weaker than it has been for many years and the property market will not recover until it returns."