House prices must fall further

10 February 2009

House prices need to fall further before the housing market can begin to recover, experts have warned.

New figures show that the number of house purchases remains at a low level despite more buyers taking an interest in purchasing property.

The Royal Institution of Chartered Surveyors (RICS) says that there has been a 16% increase in interest from potential buyers, many of whom have been tempted by falling house prices. However, there is little evidence that more buyer interest is translating into purchases. The average number of housing transactions has remained stable over the past three months – in fact, the number of transactions actually fell slightly in January to its lowest level since RICS’ records began in 1978.

Falling house prices and lower interest rates do appear to be prompting would-be buyers to return to the market. RICS says buyer interest is strongest in Wales while the balance in London continues to edge upwards.

However, with mortgage credit still restricted to people with large deposits – and many people trapped in their current homes because they are unable to sell – the housing market remains stagnant.

RICS says that house sales are expected to pick in the coming months – but only if the government’s second banking bail-out is a success and finance becomes more accessible.

"The latest survey provides further evidence of the eagerness of buyers to try and pick up bargains,” says Jeremy Leaf, spokesman for RICS. “This interest has yet to translate into sales but transactions may pick up in the coming months.”

Seema Shad, property economist from Capital Economics, agrees that, over time, the rise in buyer interest will result in increased sales.

But she warns that this alone will not be enough to rescue the housing market from its current predicament.

“With the rise in new buyer enquiries likely to be dominated by bargain-hunters, we suspect that, in the short-term, the pace of house price falls will accelerate, not decelerate,” Shad adds. “Buyer interest is clearly being encouraged by sellers’ willingness to accept offers and the prospect of lower mortgage interest rates.

“Yet, with the stream of negative economic news set to flow on relentlessly [...] further falls in house prices will be needed to generate a sustained recovery in activity.”

The latest Halifax house price index revealed that property values rose for the first time for 15 months in January. However, the bank's housing economist, Martin Ellis, says people shouldn’t put too much weight on the rise.

He says that over the three months to January 2009 prices still fell 5.1% and, historically, house prices have not moved in the same direction month-after-month even during a pronounced downturn.

Consumer confidence is key to a housing market recovery. While prices look set to continue falling, many buyers may be put off getting on the ladder.

While further house price falls are unlikely to do much to improve confidence, such an eventually will make buying a property a more realistic prospect for many.

David Smith, senior partner at Dreweatt Neate estate agents, says: "The key to a genuine recovery in the market is the wider availability of mortgage finance — and the small issue of confidence."

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