House prices yet to hit 'floor'

Kitchen floor

The 'floor' for house prices has not yet been reached despite evidence that the housing market is stabilising, economists have warned.

Two new sets of data present a positive outlook for property. The first, from the Royal Institution of Chartered Surveyors (RICS), shows the biggest increase in the number of housing surveyors reporting an increase in prices since September 2003. The survey also reveals a continued rise in buyer enquiries and an increase in the number of house sales.

The Department for Communities and Local Government, meanwhile, says house prices increased by 1.1% during April. This follows both Halifax and Nationwide reporting increases in the average value of property in recent months.

However, although the news looks good on the surface, commentators warn house prices will fall further going forward. Charles Davis, an economist at the Centre for Economic Business Research, points out that the increases in activity and interest comes from a historically low level. And with mortgage lending remaining weak, and unemployment continuing to rise, there remain serious barriers to a full recovery now or even in the near future.

“The latest data released today showed reasons to be cautious about the pace at which the UK economy is recovering,” Davis adds. “This fits with our view that the UK recovery is likely to be relatively fragile.”

Seema Shah, property economist at Capital Economics, agrees. “The latest RICS survey provided further evidence that housing market conditions are improving, although a floor for prices, let alone a recovery, is not yet in sight,” she says. “Although buyer interest is rising, as long as mortgage credit conditions remain tight and unemployment is rising, house prices will remain under downward pressure.”

Mortgage lending has seemingly improved over the past few months. Bank of England figures show approvals are up, and mortgage brokers report that cheap fixed-rate deals, and offers for people with smaller deposits, are helping to spur-on buyer interest.

But, again, lending remains historically very weak. Paul Tucker, the deputy governor for financial stability at the Bank of England, and a member of the Monetary Policy Committee, has warned that the medium-term outlook remains “highly uncertain”.

“For the moment it is unclear – as, I must say, it is bound to be at this stage – whether the financial system can generate the expansion of credit that will most likely be necessary to support recovery,” he said in a speech at an insurance conference.