Five years until house prices recover

Toy houses

Mortgage lending showed its first significant annual rise since early 2007 in July, but a new report warns that house prices will take five years to fully recover.

The Council of Mortgage Lenders (CML) reports that mortgage lending for house purchases rose for the second month running in July, with an additional 56,000 new loans issued during the month. The figures come less than a week after Halifax reported a 1.7% rise in prices for the three months to August - the biggest increase since July 2007. This rise takes the average house price to £160,973.

Despite signs that mortgage lending is now on the road to recovery, experts warn caution.

A report from the Ernst & Young Item Club predicts that house prices are in for further falls and will not get back to their 2007 peak for another five years.

The forecasting group believes that only a sustained pick-up in mortgage lending will drive a lasting recovery in house prices. Its senior economic adviser, Hetal Mehta, says signs of stabilisation in the housing market are a “false dawn”.

“Price rises largely reflect the acute shortage of available properties, with many homeowners either trapped in negative equity or reluctant to sell for fear of locking in the losses of the past two years,” Mehta explains. “A small number of cash-rich buyers have supported prices, but the supply of these funds is limited, which means prices are likely to dip again in the first half of next year.”

The CML’s figures confirm that recovery is still some way off. Its statistics show that while new lending for purchase is up on an annual basis, total mortgage lending is still 42% lower compared to July last year. This reflects weak remortgaging activity.

Paul Samter, economist at the CML, says: “It's tempting to call the turn in the mortgage market at this point, and there is certainly concrete evidence that lending for house purchase is increasing. But there are still constraints affecting the lending industry's capacity to fund increased lending, as well as less consumer motivation to remortgage for the time being.”

With that in mind, Samter expects the overall lending picture to remain “relatively subdued for some time”.

Ernst & Young warns that first-time buyers still face the most severe difficulties in getting on the property ladder.

Despite sharp falls in wholesale funding, the cost of mortgages remains high, with very few attractive deals available for new mortgages and remortgaging both in terms of tracker and fixed rate mortgages. Rising unemployment, which is forecast to hit 2.76 million next spring, will also act as a drag on the market, it says.

The CML, however, says July saw a large rise in first-time buyer activity, with an 18% increase compared to the previous month and 22% increase from the previous year.