A false dawn for house prices

Daveyk1975

A false dawn for house prices

The property market may have had a good month, but don't be fooled – things are not likely to pick up for some time yet

• Patrick Collinson
• guardian.co.uk, Thursday 5 February 2009 14.58 GMT
• Article history

Halifax reports its first monthly rise in house prices after 11 consecutive falls, and the Bank of England cuts the base rate to an historically low 1%. Is now the time to grab a property bargain before the next price spiral begins?

The figures may offer a glimmer of hope for Britain's shell-shocked estate agents, surveyors, removers, DIY stores and furniture shops brought down by the collapse in the property market.

But it's a false dawn. The lesson from the credit crunch is that it is the supply of finance that drives asset prices. Turbo-charged lending by mortgage companies awash with cash from the wholesale money markets sent house prices spiralling upwards. That tap was turned off a year ago, and it shows no sign of being turned back on.

The latest official figures show lending volumes down 59% year-on-year. Without freely available cash pumping through the system, house prices will remain at best flat, and, more likely, in decline.

Just as telling is the fact that mortgage lenders are demanding deposits of ­15%-20% of the value of a new home before they lend to a first-time buyer. Why? Because uniformly they believe that prices will drop by at least 10%-15% in the year ahead.

Only when 95% or 100% mortgages start appearing again from mainstream lenders should you start believing prices have bottomed out.

Rock-bottom interest rates in themselves do nothing to resuscitate a property market. Japan has left rates at virtually zero for close to two decades, yet house prices there have not come even close to regaining the dizzy peaks of 1989.

The biggest spectre hanging over the UK property market is unemployment. If it heads towards three million during 2009, as some predict, then expect further carnage. It is not just the absolute number of job losses but the fear of job loss that will prevent millions of families from even contemplating purchasing a new home.

One of the earliest warning indicators that Britain was heading for a property slump was when rents as a proportion of house prices dropped to record lows. Today, the trends in the lettings market offer little comfort to the optimists. In most parts of Britain, rents are falling, and letting agents are refusing to take on any more instructions. Yields may have bottomed out, but are still far to low to tempt professional investors.

Yet Britain's addiction to property investing will never go away, and confidence could return as fast as it has evaporated. The chief alternative, of investing in stocks and shares, offers few temptations. Millions of households are secretly hoping that falling prices will allow them to "trade up". That desire will put a floor under price falls. Just not right now.

http://www.guardian.co.uk/money/2009/feb/05/house-price-false-dawn

sabretoothtigger

Taking monthly figures to consider the value on a 25 year loan is obviously out of proportion, I dont think they'll be a rush to buy at any point

Just as telling is the fact that mortgage lenders are demanding deposits of ­15%-20% of the value of a new home before they lend to a first-time buyer.

Banks at several points have been asked to raise their capital ratios, which means less of the loan can come from them I guess.
I think overall they should be at 10:1 which would be 90% ltv for anyone whose a good risk?

Heyman_2

Daveyk1975 wrote: »

The property market may have had a good month, but don't be fooled

Well, duh! Who on earth would be fooled? I'm obviously in the wrong game, being a journalist is ridiculously easy. Just state the bleeding obvious.