What next for house prices?
House prices enjoyed a spring bounce during May, with the national average increasing by 1.2% during the month.
The latest Nationwide house price index shows that - along with the monthly jump - the annual rate of decline has also improved, moving from -15% to -11.3%. So, while house prices are still well below the levels seen in 2008 and 2007, there is now confidence that they may have bottomed.
“There are now clear signs that a floor has been reached for new home prices,” says David Bexon, managing director of SmartNewHomes.com. “I believe it is not simply a spring price bounce that we are currently experiencing, but a correction in price growth.”
However, other commentators – including Nationwide’s own chief economist – are not convinced a full recovery is yet underway.
“Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitively,” says Martin Gahbauer, chief economist at Nationwide.
He argues that, during the downturn of the early 1990s, there were many months during which prices rose, only to fall back down again. “In the current downturn, the combination of rapidly rising unemployment and tight access to credit implies that the last of the price declines has probably not been seen yet,” Gahbauer adds.
While the harsh economic climate may not be conducive to a housing market recovery, the sharp falls seen at the back-end of 2007 and throughout 2008 appear to be stabilising. This is partly down to the rise in buyer interest.
David Smith, senior partner at property consultancy Carter Jonas, says: “The three-month change in house prices, which rose from -3% in April to -0.5% in May, is further confirmation that prices are stabilising and is consistent with the increased activity we are seeing on the ground."
Interest picking up
Consumer confidence is playing its part in the health of the housing market. According to research commissioned by the European Union, confidence about personal finances over the next 12 months among Brits improved during May, as did expectations of the state of the economy.
Confidence about making major purchases, like property, remained stable during the month, but is higher than this time last year.
The rise in confidence is reflected in the rise in the number of people taking an interest in property. The Royal Institution of Chartered Surveyors (RICS) reports the new buyer enquiries balance has been in positive territory for six consecutive months. Meanwhile, property website Rightmove says it enjoyed its busiest ever Wednesday over the half-term holiday, with over 20 million pages being viewed in 24 hours.
But Seema Shah, property economist at Capital Economics, says that, when looked at in perspective, the rise in buyer enquiries is not that significant. “Given the low starting point from which buyer interest has had to rise from, the depressingly weak economic outlook, and the lethargic pace at which mortgage approvals are rising, it is far too early to be anticipating a stabilisation in house prices, let alone a recovery,” she adds.
Along with consumer confidence, the low levels of mortgage lending are also holding back a housing market recovery. However, evidence suggests this could also be improving.
Figures from the British Bankers’ Association (BBA) show that the number of UK home loans approved in April fell at its slowest annual rate in almost two years. So, while mortgage approvals are still down year-on-year, the sharp slide in lending appears to be levelling out.
David Dooks, statistics director at the BBA, says: “The house purchase part of the mortgage market appears to have stabilised, with slightly more approvals coming through, although April's weak net mortgage lending reflects the lower number of approvals in previous months.”
There is, however, still a long way to go before the mortgage market is anywhere near recovering. The last few months have seen interest rates on new mortgage loans fall to their lowest level since 2004 and low-deposit mortgages appear to be making something of a comeback.
Brigid O'Leary, senior economist at RICS, says: "The rise in mortgage approvals for new house purchases in April reverses some of March's fall however mortgage lending continues to be stuck at very low levels. As yet, there are few signs that the massive stimulus from the Bank of England is having a marked effect on mortgage lending, and the increase in new buyer enquiries is clearly still being stifled by restricted lending conditions.”
Supply and demand
House price movements ultimately depend on the balance of demand and supply. When demand for property exceeds supply, as it did during the housing market boom, house prices have the potential to rocket. At the current time, both demand for property and supply remain low, although the ratio of sales to unsold property has improved slightly over the past few months.
According to Nationwide, this improvement is mainly down to a reduction in supply rather than a significant pick-up in sales. Many would-be movers continue to resist putting their homes up for sale, preferring to wait until the situation improves. Others are choosing to rent out their homes instead. At the same time, the number of new homes being built has reached an all-time low.
Gahbauer is hopeful, however, that things will improve throughout the remainder of this year. “Potential sellers of existing homes who had previously delayed the listing of their property may not be able to wait indefinitely,” he explains. “The recent widely reported increases in new buyer enquires may also encourage more of these reluctant sellers to test the market in the coming months.”
But if the supply of homes coming onto the market does increase, what impact will this have on house prices – especially if demand remains low? Gahbauer warns that the recent moderation in the pace of house price falls might not be sustained if this occurs.
But he adds: “If buyer interest translates into actual sales and outweighs any potential increases in supply, then the recent moderation in price falls may continue. For the moment, however, it is unclear how the balance between supply and demand will ultimately work through in the coming months.”