Confidence improves but house prices still fall

Couple moving home

Three quarters of homeowners think house prices will not fall further over the next year, as sentiment about the outlook for the property market improves during the summer.

The latest house price index from property portal Rightmove shows that asking prices are down by 2.2% - or £5,102 – in August, compared to a 0.6% increase the previous month.

Rightmove says this fall reflects sellers pricing more realistically, as many homeowners keen to move look to take advantage of the increase in buyer activity. The website also reports a record month for traffic and a 48% decline in new sellers.

Miles Shipside, commercial director of Rightmove, says these two factors suggest the housing market is “bumping along the bottom” before house prices return to a period of consistent growth.

The fact that house price falls seem to have bottomed has bolstered consumer confidence. Rightmove’s research suggests that 75% of home movers do not expect prices to fall in the next 12 months. In contrast, in January two thirds of people were anticipating falls over the coming 12 months.

Shipside says people selling their homes over the traditionally slow summer period have been forced to aggressively market their homes – leading to a fall in average asking prices – meaning the fall is not a sign that things are getting worse again.

But despite this and the apparent return to confidence in property, the housing market remains far from healthy. House prices are down by 3.1% over the past 12 months, a similar annual fall to the one recorded in July. And prices will not start to experience significant improvement until the availability of new mortgages increases.

“Lenders are looking to remove as much risk as possible from their mortgage book,” explains Shipside. “While the government’s left hand is waving them on to lend to more home movers and small businesses, the right hand is effectively flagging them down again by urging lenders to re-build balance sheets and improve capital adequacy.”

The plight of borrowers unable to put down a deposit of at least 25% illustrates this issue. Rightmove reports an increase in the number of ‘marginal’ buyers who need to borrow 75% or more of a property’s value. However, these loans come with higher interest rates and are only on offer to people with squeaky-clean credit histories.

The fact that lenders continue to restrict borrowing for people with small deposits no longer represents their fears about house prices falls (leaving people in negative equity), says Ray Boulger, senior technical manager at John Charcol.

New rules from Europe mean that banks and building societies offering loans up to 90% of a property’s value must demonstrate significantly stronger capital adequacy than they do to offer a mortgage up to 60%. As a result, many are unable or unwilling to lend to those without big deposits.