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Your Money > Mortgages Articles > A false dawn...
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By Cliff D'Arcy
Two leading mortgage lenders have reported a May rebound in house prices. However, the downward slide is far from over... Halifax has revealed that the average UK house price leapt by an impressive 2.6% from April to May. This follows Nationwide Building Society reporting a rise of 1.2% in May last Friday. So, all is rosy and we look forward to the housing market turning the corner any day now, right? Wrong! Green shoots or a dead-cat bounce? In reality, house prices are still falling in yearly terms. All that's happened is that they aren't falling as fast as they were earlier this year. Indeed, from May 2008 to May 2009, the average price fell by almost a seventh (13.7%), according to Halifax. So, while the slope isn't as steep, it still points downward. Nevertheless, according to the most hopeful 'experts', the slump is all but over and we are bumping along the bottom. To me, this view simply doesn't ring true. It's far, far too early to call the bottom of the housing crash just yet. At best, house prices will stabilise for a while, before resuming their downward slide. In the previous housing boom, prices peaked across most of the UK in the summer of 1989 and then began their long slide. Indeed, house prices didn't return to their previous high for nearly nine years - and that's before taking inflation into account. The first of many false dawns When talking up the housing market, the bulls pin their hopes on two things: affordability and interest rates. As house prices come down from their peak, affordability improves. Furthermore, the dramatic cut in the Bank of England base rate from 5% in October 2008 to a lifetime low of 0.5% today has caused a drop in mortgage rates. However, while property pundits claim homes are looking increasingly affordable, this doesn't add up when you compare property prices to household incomes. In fact, housing still looks expensive on a historical basis. The ratio of house prices to average earnings is still above its late-Eighties peak - and it is more than twice the low reached in the depths of the mid-Nineties. Interest rates are low, which makes mortgage repayments more affordable. Alas, the next rise in interest rates - whether by the Bank of England or market forces - is likely to choke any budding recovery. In addition, you still have to find some way to pay off the capital borrowed to buy a home, which can amount to £200,000 or more. Housing optimists point to the return of gazumping and sealed bids in the London market as signs of 'green shoots' returning to the property market. However, I'm not convinced that a few super-rich cash buyers in Mayfair will translate into a UK-wide recovery. Rising repossessions, bad debts and defaults force banks to be ultra-conservative in their lending. Thus, anyone with a less-than-perfect credit history will face an uphill battle when seeking a low-rate mortgage. The grim reality Just as one swallow doesn't make a summer, one spring bounce doesn't mean an end to the biggest property bubble in British history. In my view, this spring fever won't last. The harsh reality is that the number of property transactions, mortgage approvals and home loans remain below half of what is needed for stable and rising house prices. Furthermore, salary freezes and wage cuts are commonplace, and job cuts will add another million people to the unemployment figures over the next twelve to eighteen months. Thus, while the economy remains weak, it is highly unlikely that we can sustain higher house prices by growing our wages. Also, the credit crunch is still here and mortgage rationing continues, with roughly two in three mortgages requiring a deposit of a quarter of the purchase price. Indeed, a quarter of all home loans require a deposit of at least 40%, which is beyond the means of all but a few hopeful first-time buyers.
Thanks to the collapse of the securitisation market, roughly £100 billion a year has been sucked out of the mortgage market - a sum which the banks are struggling to replace (partly with taxpayers' money). So, my advice would be to ignore the nonsense spouted by estate agents, surveyors, mortgage brokers and property hacks. Not one of these vested interests predicted the crash - and none will predict its end, either! Finally, this latest news reminds me of the 'phoney war' between 1990 and 1994, when housing commentators seized on any slight rise in house prices to argue that the crash was over. So, don't make the mistake of extrapolating any short-term trend in house prices into a genuine recovery. It's far too early for that. Having narrowly avoided financial meltdown, we've a long way to go before we're out of the woods... More from lovemoney.com Useful links: |
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