This is Money | Last updated:

26 October 2010, 4:42pm

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What's the latest?

The property market has lost its head of steam. If there was any doubt that the year-long (from March 2009 to March 2010) bounce back from recent lows was ending, then it has been cleared up as autumn replaced summer.

A slew of reports have pointed to a marked slowdown and the Halifax index recorded a record monthly fall of 3.6% for September (8 Oct). Albeit that this followed two months of rises and monthly figures are volatile.

Elsewhere, from the statistical to the anecdotal the suggestions that the mini-boom is done are clear.

›› The Royal Institution of Chartered Surveyors says 36% more surveyors reported a drop in property values for September

›› Nationwide reported house prices inching up 0.1% in September, but said a property stalemate awaits

›› Estate agents are reporting a return of gazundering as falling house prices give buyers the upper hand

 

 

Expert views: What next for house prices?

The Ernst & Young ITEM club economist Peter Spencer forecast prices to slip back and take five years to recover peak levels

Howard Archer, chief UK economist at analysts IHS Global Insight, suggests prices will be 10% lower than their mid 2010 levels by the end of 2011. His forecast is echoed by Andrew Goodwin, senior economic advisor to the influential Ernst & Young ITEM Club, who said annual price falls of between 3% and 5% will be seen over the next 12 months, before house price stabilise.

 

However, economists and property watchers agree that the effects of a slowdown will be felt differently across the UK and a 2008-style all out crash is less likely than a period of stagnation.

The threat of spending cuts and public sector cutbacks is more likely to affect areas outside London and the South East and hit them harder. Meanwhile, in the more buoyant capital and commuter areas, good properties in desirable locations are likely to prove most resilient.

 

 

 

 

- The scenarios that suggest the average price should fall from £166,000 to £144,000 (or even £110,000)

 

- What could tip house prices over the edge?

Vote: What will happen to house prices in the next year? (Oct 2010)

 

ROUND-UP: LATEST HOUSE PRICES INDICES AND PREDICTIONS

Index	Most recent	Average House Price	Monthly change	Annual Change	Link to report	Peak
Halifax	Sep 10	£162,096	-3.6%	+2.6%	Full report	£199,612 (Aug 07)
Nationwide	Sep-10	£166,757	+0.1%	+3.1%	Full report	£186,044 (Oct 07)
Land Registry	Aug-10	£167,423	+0.3%	+6.7%	Full report	£184,493 (Jan 08)
Hometrack	Sep-10	n/a	-0.4%	0%	Full report	n/a
Rightmove (asking prices)	Oct-10	£236,849	+3.1%	+2.9%	Full report	£241,642 (Oct 07)
Department of Communities	Aug-10	£213,116	-	+8.3%	Full report	£220,291 (Oct 07)
LSL Acadametrics (formerly FT)	Sep-10	£223,965	+0.2%	+7.0%	Full report	£231,804(Feb 08)

The headwinds facing the market

The big potential stumbling blocks for the property market.

• Interest-only mortgage crackdown

• Lenders warn of a new mortgage crunch

Lenders are making it tougher to take out cheap interest-only loans, which have helped prop up the property market. This is a reduction in credit and will exert downward pressure on prices. (Read the full analysis)

The second problem is a fresh mortgage crunch. When the Special Liquidity Scheme runs out, starting in 2012, lenders say they will face a £300bn shortfall.

What next for house prices

 

Eventually a rise in the number of homes for sale is pushing down prices. On the flipside, mortgage rates for those with a 25% deposit look good, while rates for those with 15% and 10% deposits are improving. This could deliver another slice of buyers for whom property looks affordable.

The property market is precariously balanced. On a fundamental level prices should not be rising with the problems that remain in the economy, and the market will continue to struggle given woeful economic problems the country faces.

 

Buyers tempted to break the bank should bear this in mind and ensure they can take the hit of future interest rate rises.

- Simon Lambert, assistant editor

 

 

 

 

 

Property predictions: Will house prices rise or fall?

 

• Rics: house prices will rise in 2010

• Halifax: house prices will not rise in 2010

• Property to stall agree economist and agents

• Capital Economics: House prices need 'five years to recover'

• Fitch: House prices will fall another 20%

• Nouriel Roubini: More bank woes, more house price falls

• Jones Lang LaSalle: Property to fall as 'irrational' rally ends

• E&Y ITEM Club: House prices 'will fall again next year'

 

 

- House price tables, charts and graphs

 

 

 

 

 

 

 

Anatomy of a house price slump: how it happened

 

The party finally came to a sticky end for UK property prices in 2008. After a decade long boom, the market peaked in late summer / autumn 2007, and then prices tumbled as banks beat a hasty retreat from easy lending.

House price falls accelerated through 2008 and property market activity hit record lows in late 2008 and early 2009. Since then activity has improved and stabilised, but although a shortage of property means some areas look buoyant, in reality transactions are running at almost half of what is considered normal.

The property market's performance in 2008 was worse than almost all of the gloomiest predictions made for the year.

Of the major reports, the gloomiest picture was painted by the Halifax. Its index showed the average property losing a greater percentage of its value in just 12 months than during the whole peak to trough period of the 1990s crash.

In December 2007, the Halifax index said the average home was worth £197,074, a year later this had fallen to £159,896 ' a drop of 18.9%. At the peak before the 1990s crash, Halifax's figures show the average home was worth £70,247, in May 1989. Six years later, property prices bottomed out, in July 1995, at £60,965. This was a peak to trough loss of 13.2%.

Due to the way it compiles its figures, by comparing a three month average with the same period a year earlier, Halifax's official figure showed prices falling 16.2% in 2008. However, this still represented a record fall ' the previous most rapid annual decline being -8.3% in December 1992.

The Land Registry's report showed property prices falling by 13.5% over the year, with the average home in England and Wales worth £158,946 ' a similar value to October 2005. Even in the supposedly robust London market, the average home lost 12.9%, or £45,585, to end 2008 worth £307,071 ' a similar value to November/December 2006.

The smallest fall registered by a major house price index for 2008 was Hometrack's (8.7%), while the FT Academetrics study, which claims to improve on other studies methods, said prices fell 10.4% over the year.

 

 

- Tools: House price crash calculator

 

 

 

How the property market was hammered?

 

While property price statistics for 2008 and early 2009 paint a fairly bleak picture, they do not fully reflect the devastation wreaked so rapidly.

In a little over a year, a booming property market became desolate, with the Royal Institution of Chartered Surveyors reporting its agents selling less than one property per week of the year.

A perfect storm hit the UK property market in 2008. With property prices having risen by 200% in the ten years to December 2007, according to the Land Registry, property was in a bubble.

Many economists had predicted that this bubble was ripe for bursting, but after showing signs of a slowdown in 2005, the market sped up again and the average price peaked between August 2007 (Halifax: £199,612) and January 2008 (Land Registry: £184,784).

The pin that burst the bubble was the credit crunch. The sub-prime crisis that had been brewing in the United States erupted in the summer of 2007, and as the year continued, the residential mortgage-backed securities market that had driven massive growth in credit for homeloans essentially ceased to exist.

 

These allowed lenders to sell packaged residential mortgages to a special purpose vehicle, which then issued debt to investors, lured by strong returns from a supposedly liquid and low risk investment.

According to the interim report by Sir James Crosby, commissioned by the Treasury, between 2000 and 2007, the total amount outstanding of UK residential mortgage backed securities and covered bonds rose from £13bn to £257bn. The report said that by 2006 mortgage-backed security funding accounted for two-thirds of new net mortgage lending in the UK.

In July 2007 this market came to an 'abrupt halt', according to Crosby. This brought about the collapse of Northern Rock in the UK, problems for banks such as Bradford & Bingley that had fuelled the buy-to-let boom and major issues for all mortgage players. In February 2008, Northern Rock was nationalised and American bank Bear Stearns, which had specialised in the fancy finance that fuelled the mortgage boom, collapsed. It was the final sign that the party was over.

Banks fearful of huge losses began to dramatically cut back on mortgage lending and a vicious circle began. The more banks cut back on lending and raised deposits, the fewer homebuyers could secure finance, the more property prices fell and banks became more fearful and cut back further on lending.

 

 

The mortgage crunch and property prices

 

Mortgages are the key to the property market. The vast majority of buyers cannot purchase a property without a homeloan and the price, availability and restrictions imposed on these have the biggest impact on their ability to buy a home.

 

The dramatic slump in property prices in 2008 and early 2009 came as lenders turned off the mortgage taps. Lenders suffered a lack of funding, with the mortgage backed securities market that accounted for two thirds of new lending suddenly seizing up. Meanwhile, banks were also hit by a crisis of confidence, as they looked over the Atlantic and saw the devastation wreaked in America heading for the UK.

Mortgage rates rose, deposits were hiked and reports abounded of lenders pulling mortgages at the eleventh hour. Mortgages for home purchases dived by 49% in 2008, to just 516,000, according to the Council of Mortgage Lenders. This was the smallest number since 1974 and represented a third less than the 723,000 approved in 1991 ' the lowest level of the 1990s slump.

The Bank of England's monthly figures have also shown mortgage activity drying up. The number of mortgages for homebuyers hit a record low of 27,000 in November 2008, rising to around 31,000 to 32,000 in December and January 2009.

In September 2007, just before the downward spiral began Bank of England figures showed mortgage approvals for homebuyers of 102,000 ' significant at that time as this was the lowest level for two years. The level of mortgage activity for home purchases in the first half of 2009, was about 60% below that figure and economists say approvals need to be at at least 70,000 to 80,000 per month for prices to stabilise.

 

 

The property slump unpicked

 

• Analysis: House price crash myths: True or false?
• House price tables and graphs
• Calculator: House price crash calculator
• Property prices: Look up house prices in your road
• The property market near you - what's really happening?
• House price forecasts: Will your home sell in 2009?
• Property prices: News, analysis and what's next

Confidence, the property market and property prices

 

A crucial driver of property prices, as with that of any asset, is confidence. The public's confidence in property, shares and banks is at a serious low. Compounding the problem of a lack of confidence in these economic cornerstones is the uncertainty surrounding jobs as the recession bites. Redundancies and cut backs have led to a record rise in unemployment, with more people out of work than any time in the last 15 years.

If the property market manages to stage a recovery in the next 12 months, it will be against all odds, given the severe recessionary backdrop and slump in confidence. Bargain hunters may be searching for a first home, a bigger property or an investment, but the number of people actively willing to commit to buying will remain depleted until the economy improves.

 

 

 

Inflation and paying off your home

 

One of the effects of the rapid inflation in property prices since the early 1980s is that it paid off a generation's mortgages.

Those who bought a home in the 1980s to early 1990s, and then held on through double-digit interest rates and the 1990s crash, have emerged with properties that have risen to be worth five to ten times their mortgage.

The average UK property cost £30,898 in 1983, according to Halifax, and £198,500 in September 2007 ' an increase of 542%. Even allowing for the current slump that property was worth £160,327 in February 2009, an increase of 419%. For a similar effect to be delivered to a modern day homebuyer, the cost of the average property would need to stand at £832,097 in 2035.

In 1983 the average wage according to the Office of National Statistics was £7,700, today the most comparable measure stands at £24,900, an increase of 223%. If both property and salary inflation are sustained at the same long-term rate, the average wage by 2031 will be £80,500 and the home will cost 10.3 times more. This compares to the average home costing four times the average wage in 1983 and 8.5 times the average wage (£23,300) at the peak of the Halifax index in August 2007.

 

 

Buying or selling a home? We can save you money

 

• Find the best mortgage for you
• Find a solicitor for your conveyancing
• Find a better home insurance deal
• Find the best equity release option
• Guides: Buying, selling and mortgage advice
• Mortgage calculator (rates and fees)
• What next for house prices?
• What next for mortgage rates?

The positive side - demand and supply and property prices?

 

Pessimists would have you believe that property in the UK is doomed, but this ignores the fact that housing is not stocks and shares.

Owning a home is an emotional desire, a must-have aspiration for most Britons, and the demand for property in Britain remains high. Prices may have fallen by 20%, but many potential buyers see this as a good purchasing opportunity.

The shortgage of supply of property in the UK compared to demand has arguably been exaggerated by developers and the Government, but decent sized family homes in popular areas are typically in short supply.

Government development targets and planning guidelines have focused on quantity rather than quality. Target-led development has encouraged major scheme developers to concentrate on flats and small properties in order to deliver the most homes at the cheapest price.

A report by the National Housing and Planning Advice Unit the government's independent housing experts said that an undersupply of larger homes pushes up the cost of all properties and exacerbates house price inflation problems.

House price crash: Not everyone is upset

While the rapid fall in property prices has brought tough times for those who have seen equity slashed, fallen into negative equity or even had their homes repossessed, there are others who are pleased that prices are falling.

Lower property prices are a boon to first-time buyers and those moving up the property ladder, but only if they can raise the substantial deposit needed to take advantage. Research from Halifax showed homes were more affordable than the 25-year average in the first three months of 2009, but the average buyer would need to raise a £50,000 deposit.

Meanwhile, those who predicted a slump and have actively agitated for a house price crash are also pleased. Property prices are an emotive subject and forums such as housepricecrash.co.uk, have rounded up news, data and opinion and benefited from the UK's fascination with property, whether it's value is going up or down.

Read more: http://www.thisismoney.co.uk/property-prices#ixzz13xKGP4AJ