House price rises "not sustainable"

26 August 2009

The recent rise in property values isn’t sustainable, and experts warn homeowners can expect to see prices fall again before too long.

Over the past few months, several house price indices have shown an increase in property values, leading to renewed optimism that the worst of the crash is now over. Nationwide reports that house prices have risen for the fourth consecutive month, with a 1.6% uplift in values during August.

Nationwide's key findings:

* The price of a typical house rose by 1.6% in August
* Average house prices increased by 3.3% between June and August – the highest rise since February 2007
* The first eight months of 2009 have seen prices rise by 3.2%
* The typical property is now worth £160,224 – down 2.7% from August last year and 14.4% from the peak in October 2007

Despite house prices remaining down on an annual basis, the slight rises have bolstered confidence. In August, the Royal Institute of Chartered Surveyors predicted house values would end the year higher than they started. And a survey from property portal Rightmove found that three quarters of homeowners think the housing market has bottomed.

Meanwhile, the British Bankers’ Association (BBA) recently reported that mortgage approvals have increased by 77% since July last year, a sudden buoyancy that could last into the autumn.

However, despite the seemingly massive jump in approvals, the amount of lending remains historically low – and experts warn the slight recovery in both lending and house prices cannot be sustained.

Housebuilders are concerned that such restricted lending will prevent any significant recovery in house prices. Bovis Homes, which reported a loss of £8.6 million for the first half of 2009, says that while mortgage lending is increasing this is still well below ‘normal’ levels.

It adds that unemployment, the increased supply of property up for sale and the outlook for interest rates all “pose a threat”.

Meanwhile, Persimmon Homes warns it remains “understandably cautious” about the outlook for the property market, with the pace of recovery dependent on the availability of mortgage finance.

Unfortunately, lenders remain unwilling to dramatically increase their mortgage activity. According to data provider Moneyfacts, the margin between average mortgages rates and the Bank of England base rate has increased.

Michelle Slade, spokeswoman for Moneyfacts, says: "Margins continue to be increased as lenders look to repair dented balance sheets. Normal rules where lenders pass or decrease rates based on the cost of funding seem to have well and truly gone out of the window.”

Some experts say activity in the US is a good indicator of what might happen in the UK, as its property market crashed ahead of ours. According to Simon Denham, managing director of Capital Spreads, house prices in the US also appear to be on the up – but he adds that this isn’t necessarily a good sign for prices this side of the Atlantic.

“Certainly there are indications that things are improving in the US and to some degree in the UK too, but UK house prices haven’t suffered the same fall-out as those in the US, so it’s difficult to see whether the UK’s recent strength is sustainable,” he explains.

Another sign that suggests recent rises in property values could only be temporary is the price of property sold at auction. Although this has risen slightly in recent months, it appears to have fallen back again.

Forecasting group Capital Economics says the speed of sales at auctions means this fall reflects the wider housing market and what the future has in store for it.

“It's not difficult to explain why the improvement in housing market conditions may only be temporary – after all, not only is the economic backdrop still weak, with the rise in unemployment showing little sign of coming to an end, but lending criteria remain a significant obstacle to buyers,” says Seema Shah, property economist at Capital Economics.

“We suspect that the recent recovery in house prices may not be sustained for too much longer.”

According to Nationwide, the fact that the Bank of England base rate has been just 0.5% since March this year was one of the key factors helping to bolster house prices during the summer months. Before the central bank started to cut the base rate, the average homeowner spent 38% of post-tax income on mortgage payments – this has since fallen to just 28%.

“Partly as a result, fewer second-hand properties have come onto the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009,” explains Martin Gahbauer, chief economist at Nationwide.

But the base rate cannot stay low forever - and the real danger could come when it starts to rise.

“At the moment, a rise in interest rates is probably still some way off,” Gahbauer adds. “However, the eventual exit from exceptionally loose monetary policy could make the recovery in the housing market bumpier than some might expect after the last few months of price increases.”

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