News: Weekly News Round Up - Confusion Reigns

Fri, 01 Aug 08

Confusion was very much a key theme in housing market news this week with a raft of seemingly conflicting house price updates released.

The week started in spectacularly optimistic fashion, with a report by the National Housing Federation, predicting that between 2011 and 2013 annual house price growth could rise by as much as 25% - see Home News 28 July 2008.

Its research paper called Home Truths, which was compiled by independent economic research group Oxford Economics for the housing association umbrella group, concedes that house prices will continue to fall by around 4.4% in 2008, with similar falls predicted for 2009.

However by 2010 the lack of supply of new housing, an easing of the credit crisis that will free up mortgage funding and increasing demand for homes will combine to send prices rocketing by 2011, the NHF argues.

Every organisation analysing house prices has their own agenda, with the National Housing Federation no exception. Housing Associations are crying out for more housing stock and are looking to hammer home the point that if supply falls back any further the UK could be faced with a crippling shortage.

But despite this agenda their argument does have some credence. Basic supply and demand rules will mean that when favourable mortgage deals reappear desperate first time buyers will be chomping at the bit to snap up good quality homes.

As long as favourable mortgage deals are in place, it is indeed likely that many will pay more for the meagre supply of good housing on offer, as they have for most of the last decade.

The Federation’s chief executive David Orr is particularly upbeat. He said: “Demand for housing is going up, while the supply of new homes is going down. This means that as soon as the economic outlook improves house prices will resume their previous upward trajectory.”

Within days of the publication of this report the housing market was brought back to the more immediate reality. House prices are continuing to fall, and plummeting at an alarming rate.

First up was the Land Registry’s latest figures for June, showing a 1% fall from May, the tenth month in a row to show a slow down in house price growth  - see Home News 29 July 2008.

Even the Land Registry concedes these figures are out of date, as they are based on completed deals, but they still show that annual house price growth two months ago was at best static, showing a small growth of 0.1%.

London, which has seen some of the sharpest increases in recent years, was among the heaviest hit, with a drop of around 2.5% in prices between May and June.

Next was the Nationwide’s turn. The building society says house prices have dropped by 8.1% over the year, the biggest annual drop since it began compiling its price index in 1991 – see Home News 31 July 2008.

This has seen £15,000 wiped off the value of the average home in the last 12 months. But such is the strength of the housing market over the last decade that a house bought in August 2005 is still worth £11,000 more than one sold this July.

Standard & Poor, the credit rating firm also waded into the debate over house prices this week, adding further weight to the argument that there is little or no light at the end of the tunnel.

Its researchers believe house prices could fall by as much as 17% over the year, a move that would plunge 1.7m households into negative equity – see Home News 31 July 2008.  

A key factor in this depressing picture is the lack of supply of mortgages, according to Financial Services Authority deputy chairman Sir  James Crosby.

His report to the treasury released this week says that mortgages will continue to be in short supply and prices will continue to fall for at least two years unless action is taken - see Home News 30 July 2008.

Being proposed is a controversial scheme whereby taxpayers effectively underwrite the flagging mortgage sector.

The Council of Mortgage Lenders was understandably welcoming of the proposal. Their members are struggling to find investment in their beleaguered sector and would welcome the security offered by a Government guarantee of its funds.

Unless action is taken, “the housing correction will overshoot, and the knock-on effects on the wider economy will be significant,” said CML director general Michael Coogan.

Taking into account this largely bleak picture for the housing market with the National Housing Federation’s optimistic report and the ray of hope signalled by Crosby, it is no wonder that homeowners and potential first time buyers have been left confused.

Are prices going to fall for a number of years, or pick up in the near future? 

The crystal ball gazing continues.

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