House prices have fallen by 10.5% since last year as negative sentiment effectively freezes the market.
The latest Nationwide house price index shows the pace of house price falls did ease up slightly in August, with a quarterly fall of 4.5% as opposed to the drop of 4.6% seen in July. However, on a yearly basis, house prices have now fallen by 10.5% bringing the average price tag to £164,654.
Nationwide, the UK’s largest building society, blames continuing falls on “subdued” housing transactions and restricted lending. And despite estate agents reporting a return of buyer interest, Nationwide points out that house builders are suffering “significant” falls in business despite offering big sale incentives.
Fionnuala Earley, chief economist at Nationwide, says the falls justify falls in interest rates.
“There is still a great deal of uncertainty, but the Bank of England’s forecasts of growth and inflation have been widely interpreted as opening the door to rate cuts,” she adds. “We expect the next move in the Bank of England base rate to be down, but the extent to which this will revive the mortgage and housing market is likely to be limited while overall confidence in economic and housing market conditions is low.”
The data has sparked new speculation over how far prices will fall.
Peter Newland, an economist at Lehman Brothers, says: “The risks to our forecast of a 15% decline in house prices over the course of 2008 and 2009 are now squarely to the downside… We continue to expect the Bank of England to cut rates before the end of the year.”
The poor health of the housing market wasconfirmed this week with two large housebuilders reporting challenging conditions and falling profits.
At the start of the week Bovis Homes, Britain’s fifth biggest housebuilder, said it was experiencing its toughest period of trading ever, with profits down 84%. And Taylor Wimpey has also admitted losses of £1.5 million as “challenging” conditions in the UK, US and Spain hit its revenue hard.
David Ritchie, chief executive of Bovis, says the firm sees no end in sight for the downturn as a lack of mortgage lending continues to restrict people’s ability to buy a home.
And Pete Redfern, chief executive of Taylor Wimpey, says: “While conditions are likely to remain tough in both the UK and the US in the short-term, we are maintaining momentum in the UK and we have seen pockets of stabilisation in the US. We believe that both markets continue to be attractive on a longer-term view."
The latest figures from the high street banks show that mortgage lending actually increased slightly in June and July following months of restricted activity.
TheBritish Bankers’ Association (BBA), which compiled the figures, says lending rose by £4.3 billion in July, but that the number of mortgages approved for house purchase continues to be “very low” while remortgaging activity has fallen.
Despite lending leveling off in July, David Dooks, director of statistics at the BBA, says: ”It would be premature to think that the housing market will now start to recover, because overall approval activity continues to be very low. “
Meanwhile, research from price comparison website, uSwitch.com, suggests total mortgage lending and unsecured personal loans plummeted by £11 billion from the second quarter of 2007 to the same period in 2008.
And comparing the 12-month period to July 2007 and to July 2008, mortgage lending appears to have dropped by almost £20 billion.
Simeon Linstead, head of personal finance at uSwitch.com, says: “Both mortgage lending and unsecured loans are drying up by the day. For those with perfect credit records, it’s unlikely this will be an issue, but for others it could be problematic. In response to this, it seems consumersare turning to credit card providers for extra cash.”
Even buy-to-let, which has seen a slight boom thanks to landlords taking advantage of lower house prices, continues to be constrained by lending restrictions.
The Council of Mortgage Lenders says the numberof buy-to-let loans now stands at over 1.1 million, with more than 144,000 new mortgages taken out in the first half of this year.
But the fact that many buy-to-let lenders rely on wholesale loans (rather than retail deposits such as saving accounts) to fund their lending, means that growth in the buy-to-let market is being held back.
Although mortgage rates have fallen off over the last few weeks, lending criteria remains tough especially where deposit requirements are concerned.
New research reveals homebuyers now need at least £40,000 spare cash to put down as a deposit if they want to secure one of the more competitive mortgage deals.
With most lenders only offering their cheapest mortgages to people with large deposits, the amount of deposit required from borrowers has soared 43% since last year.
Buyers in the North East (where house prices are lower) require the smallest deposit while those in London need to fork out the most. In fact, buyers looking for a cheap mortgage deal need to be able to put down £71,616 in order to qualify.
According to mform.co.uk, just one year ago most best-buy mortgages required an average deposit equal to 11.75% of a property’s value. Since then, however, lenders have become more demanding and the average deposit required for a best-buy mortgage is now 20.75%.
For two-year fixed-rate deals, often the most popular, you’ll now need a deposit of 23%.
Francis Ghiloni, a director at mform.co.uk, says: “Availability of mortgage deals remains the biggest issue for borrowers who do not have equity in their homes. Those who have benefited from the decade-long housing boom can still qualify for the most competitive rates.
"However, first-time buyers or those who have entered the property market recently will struggle to qualify for the most competitive rates.”