The UK housing market is in trouble. 6 out of the 9 regions in England registered falls this month, with asking prices for homes in Greater London falling fastest of all, by 1.2%, the Home Asking Price Index report revealed today. The overall drop for England and Wales was 0.4%, which equates to a loss of £1,030 in a single month for the average homeowner, while the average London property lost £4,208.
The recent turmoil in the world's financial markets seems to have finally triggered this much-anticipated tipping point, as fear of default has forced mortgage lenders to price out sub-prime buyers with additional risk premiums. "With wage inflation falling, interest rates rising and house prices surging up for over a year - a correction was inevitable," commented Doug Shephard from Home.co.uk. "The housing market now looks to be changing rapidly to favour buyers over sellers."
UK mortgage lenders were earlier criticised by a Financial Services Authority report in July for not properly checking the creditworthiness of homebuyers they were lending to. But this warning about irresponsible lending came far too late to avert a problem that has been growing for years and is estimated by the FSA to affect 8% of the mortgage market.
The sub-prime fall-out for UK house prices could be very serious. In response to the crisis, mortgage lenders are now increasing mortgage rates for prime as well as sub-prime mortgages. This will mean fewer buyers will be able to raise finance and demand will fall further, but there could also be a negative effect on supply.
"The outlook for UK house prices is rather bleak as the already observed slowdown is likely to precipitate further price falls, brought about by increased supply," states the Home report. Increasing numbers of distressed sales by the heavily indebted may trigger a further sell-off from property speculators wishing to reduce their debt burden, as capital gains can no longer be made.
Many with vested interests in the housing market would like to think that the sub-prime mess will soon blow over, but institutional investors have lost much of their appetite for mortgage debt and sub-prime certainly won't interest them for a long time. The immediate result of this credit tightening by mortgage lenders has meant fewer buyers competing for larger numbers of properties for sale.
Until the balance between buyers and sellers is restored house prices will continue to slide. A cut in the Bank of England base rate could give some temporary respite to homeowners but that risks moral hazard and could let inflation off the leash, which would land the economy in a worse mess.
The Home.co.uk Asking Price Index reports may be viewed at https://www.home.co.uk/asking_price_index/
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