Don't expect miracles in housing market

Allister Heath
IT is beginning to look as if house prices won&rsquo;t be falling much further. This won&rsquo;t be of any use to the one in ten Brits that have already been plunged into negative equity, however; and even if the market reaches bottom this year, it will struggle in 2010. We must hope, for the sake of stability, that we don&rsquo;t ever again allow a bubble to inflate prices to stratospheric level, but this means the market will remain sluggish for years to come. For those whose mortgage is higher than the value of their home, the only way out will be to save up and repay debt, rather than being able to ride the recovery and exit automatically. <br /><br />House prices haven&rsquo;t fallen as much as many had feared or else negative equity numbers would be greater. Yet the decline has been much quicker than expected. The Nationwide reports a peak-to-trough drop in prices of 20 per cent; other measures which include cash purchases and actual prices paid (rather the value of mortgages) suggest a more modest 14 per cent collapse. Lower inflation helps to explain the speed of the decline: in the past, a smaller drop in nominal values was required to achieve the same decline in real prices.<br /><br />There are several reasons why house prices have stopped falling: we have much lower mortgage rates, as highlighted by Lombard Street Research&rsquo;s housing affordability index; there has been a collapse in the supply of homes put up for sale; and the slump in sterling has enticed foreign buyers. <br /><br />The average standard variable rate on mortgages is now 3.8 per cent, half its level of eighteen months ago, leaving average UK house prices at their most affordable level in 40 years in terms of monthly payments as a share of income, according to Lombard Street Research (houses remain at elevated levels compared with historic price to earnings ratios, however). <br /><br />Some potential sellers are staying put, waiting for a recovery in prices; others have been prevented from selling because their own equity has been so depleted that there is simply no way that they would be able to buy a larger home. Many have responded by putting properties onto the rental market instead, driving down rents significantly, especially in areas with lots of newly-built flats. The sales-to-stock ratio calculated by the Royal Institution of Chartered Surveyors has climbed to 20 per cent, its highest level in a year. While estate agents enjoyed just 11.8 sales on average in the last three months (the 2005-7 average was 25), the stock of properties on their books is at its lowest level in five years. Rightmove has been highlighting the decline in properties being put on the market for at least a year. <br /><br />Anybody hoping for a sharp upturn in property prices will be bitterly disappointed. There is a large overhang of homes waiting to hit the markets when conditions recover. We won&rsquo;t be returning to the ultra-loose conditions that fuelled the bubble, not least because so many lenders have permanently quit. And with the UK crippled by Gordon Brown&rsquo;s higher taxes, bloated government, high costs and general mismanagement, net migration is unlikely to be as high in the years to come &ndash; and in any case we now know that those predicting a vast increase in the number of households (which would boost demand for property) this decade have turned out to be wrong. There will be no more free lunches for investors, even in the housing market.