House prices down by 16% in 2008

2 January 2009

House prices fell by 16% in 2008 bringing the average property value to 2004 levels, according to figures from Nationwide.

Figures from the building society show that prices fell by 2.5% in December, bringing the annual rate of house price deflation to 15.9%. This is in stark contrast to the 0.4% fall seen in November.

Other figures from Halifax, published last week, also show annual house prices falls of 16.2% in 2008 - bringing the average property value to £159,896.

The bank says 16.2% has been wiped off the value of housing stock in the UK between December 2007 and 2008, including a 2.2% fall last month and a 5.2% fall in the fourth quarter of the year.

Fionnuala Earley, chief economist at Nationwide, says that despite the monthly leap, the picture may not be as grim as it first appears.

“The three-month on three-month rate, which smoothes the volatility often seen in the monthly numbers, shows a fall of only 4.2% in December,” she explains. “This is its slowest pace since May 2008. The price of a typical house is now £153,048, around the same level as of spring 2005, but still over £17,500 more than five years ago.”

Recent figures from the Bank of England show mortgage lending in November fell with just 27,000 loans approved - the lowest number since the central bank first started recording lending in January 1999.

Andrew Montlake, partner at independent mortgage broker Cobalt Capital, says: "The November mortgage lending figures are just another grim reminder of the death, last year, of easy money and consumer confidence, and there will be many more in the months ahead before things finally start to improve."

The Conservative Party says the Bank of England's figures show that Gordon Brown's recession policies are not working.

George Osborne, shadow chancellor for the Conservative Party, says: "First we discovered that there were fewer shoppers in December despite the VAT cut, now we discover house prices are falling sharply and mortgage approvals at a record low despite the stamp duty holiday introduced three months ago.

"The new year shows that Gordon Brown’s policies are not working and the recession is getting worse not better."

Outlook for 2009

Both Halifax and Nationwide have refused to release forecasts for 2009, citing market uncertainty as a major obstruction to any accurate prediction.

Earley says: “2008 was a year of turmoil in the UK housing market. The disruption in the financial markets worsened throughout 2008 and had larger implications for the real economy than we anticipated a year ago. Conditions remain highly volatile going into 2009, making it more difficult than usual to arrive at a specific forecast for house prices. In these unsettled times a forecast subject to frequent change could itself add to greater uncertainty.”

However, both lenders agree that 2009 will bring more of the same turmoil seen in 2008 – falling house prices, dented consumer confidence and a lack of mortgage finance.

“The UK and various other economies slipped into recession in the final quarter of 2008 and there is little sign that this trend will be reversed in 2009,” says Earley. “These conditions have already prompted the Monetary Policy Committee to cut the base rate by 3.5%, and are likely to lead to further falls in 2009 in an effort to prevent a deeper recession. It looks like 2009 will be a bumpy year for the UK economy.”

However, Martin Ellis, chief economist at Halifax, says the fact that the fall recorded in quarter four is similar to those seen in quarter two (5.1%) and quarter three (5.6%) suggest the underlying rate of decline may be stabilising.

“Continuing pressures on incomes and the negative impact of the dislocation of the financial markets on the availability of mortgage finance are expected to exert further downward pressure on the market over the coming months,” he explains. “But a number of factors will help to support demand and should help to limit the downturn.”

These include improving housing affordability and easing pressure on the majority of households' finances.

One of the biggest factors preventing any recovery in the housing market is mortgage credit – or lack of it. Many homeowners are unable to remortgage because the value of their property has fallen or their credit record prevents them from qualifying for a new deal, forcing them to remain on their lender’s standard variable rate, while others who have been able to get a new fixed-rate deal are likely to have seen their monthly payments increase.

Borrowers on tracker rate mortgages, however, will have seen their payments decrease but new borrowers hoping to benefit from falling interest rates are likely to be left disappointed as lenders pull tracker deals or hike the costs.

At the same time, lenders are only offering their most competitive deals to those with larger deposits.

Early says there is little sign that of this situation getting better: “The latest Bank of England credit conditions survey shows how credit conditions have been tightening at a slower rate over the last year. This may suggest that we are past the most severe phase of tightening and may mean some stabilisation or even relaxation in criteria in 2009.

“However, it is unlikely that conditions will relax to the levels seen in early 2007.”

A lack of consumer confidence in the housing market is also holding up a recovery. Early believes that until the economy and the labour market stabilise, households are unlikely to become any more “upbeat” about the outlook for house prices.

On a positive note, falling house prices and a period of depressed buyer numbers could actually play a part in the eventual recovery.

Early calculates that around 750,000 first-time buyers have been “locked out” of the property market since 2003. “Clearly this estimation is fraught with uncertainty and sensitive to assumptions, but it does appear likely that a substantial pool of pent-up demand has been building up, which could make its way back into the market when affordability improves and economic conditions and house price growth expectations stabilise,” she adds.

But Seema Shah, property economist at Capital Economics, is bearish about the outlook for house prices in 2009.

"This year, house price falls are set to be at least as large as in 2008," Shah believes. "Despite falls to date, house prices continue to look expensive. Affordability and valuation measures suggest that the correction has considerably further to run. [Plus] the availability of credit is likely to tighten further in 2009 [...], the economy is set to contract and unemployment is set to rise very sharply."

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