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House prices will probably fall in 2010

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 06 October 2009  |  Comments 2 comments

Halifax said house prices rose by 1.6% in September but I still reckon prices could go into reverse next year.

It's a while since I last wrote about house prices. I've been pretty negative all year but I can't deny that prices have risen recently. 

The latest news of rising prices has come from Halifax. The bank says prices rose 1.6% in September which is the third consecutive monthly increase and the fifth so far in 2009. Prices are still 7.4% lower than a year ago, but there's a clear upward trend. 

Now I still think there's a good chance that the trend will reverse next year. But I thought I'd first look at reasons why property prices might carry on rising. 

Positive points for the property market 

 

Banks prefer to raise money for lending via such sales because they're cheap and simple. Admittedly, the banks are still having to offer significant premiums over the benchmark Libor rate. But the simple fact that money is being raised via these routes is a positive development. It means that banks won't have to rely so much on ordinary savers for funds to lend out. Or on short-term funding from other banks and investors. Both sources of funding are expensive. 

  • Banks that have had relatively good credit crunches - such as Santander, Barclays and HSBC - have the balance sheet strength to offer attractive products. They're winning market share as a result. It's obvious that all three banks see the current situation as a great opportunity. I think they'll want to carry on competing hard with market-leading offers.

So why am I gloomy? 

  • Our public finances are in a mess. Taxes are going to go up and public expenditure will come down. That will mean low economic growth and rising unemployment. House prices will suffer.
     
  • The base rate conundrum. It's possible that inflation will take off in 2010 - or more likely, 2011. If that happens, the base rate will jump too and some homeowners will start to struggle with their mortgage payments. Yes, it's possible that inflation won't take off and the base rate will stay low. In fact, I think that's quite a likely scenario. But low inflation will be accompanied by sluggish economic growth. So whether the base rate is high or low, I think house prices will still struggle. 
     
  • I suspect that house price rises have been at least partly driven by a shortage of supply. Higher prices may now bring out more sellers and that will at least put a lid on further price rises.  

In summary, I think our economic recovery is very fragile. And its fragility will outweigh any positive impact from a thawing mortgage market. I think it's fair to say that house prices will probably fall again in 2010. 

So what do you think? Let me know..... 

More: Get ready for the housing crash part 2

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Comments (2)

  • Chris2685
    Love rating 2
    Chris2685 said

    Sounds like a fairly balanced report... It is impossible to say what will happen, but the chances are growth will be slow or stagnant, or drop. Unless the world goes insane, in which case there will be a massive rise!

    Report on 08 October 2009  |  Love thisLove  0 loves
  • matchmade
    Love rating 33
    matchmade said

    Low supply is likely to continue to be a problem for many years, as so few new houses are being built in the negative economic environment, with the cost of construction continually increasing, and with heavy S106 and planning gain taxes on top of highly restrictive planning rules. Homeowners are only likely to sell if they are forced to, so most will sit tight and improve what they have already. Supply is also held down by reduced labour mobility as people are less willing to take the risk of changing jobs in a recession.

    I'm pleased Ed Bowsher didn't roll out that time-honoured chestnut about house prices being determined by salary multiples and nothing else, and that therefore the only sensible house market will be when average prices are at their "natural" ratio of 3 to 4 times average salary, i.e. between £75,000 and £100,000.

    Surely what matters is not salary multiples, but affordability. The long-term average for affordability is that people generally spend 20-25% of their take-home income on accommodation. However, this is gradually increasing, because items like food take up much less of the family budget than they used to, and people seem prepared to spend more on their houses in order to secure a scarce asset that has good long-term growth potential as well as giving you somewhere to live. In addition, if interest rates are low, people can afford to spend more on their accommodation. And there are a myriad of additional factors: the amount of wealth being passed down the generations and increasing people's deposits, the average level of prices in a given area or region (the north-east differs dramatically from London, for example), whether both people in a relationship are in paid employment, the attractiveness of property as an investment (meaning people use capital that they might otherwise put into bonds or shares or ISAs), the supply of property at different price levels in the marketplace in a given area, and so on.

    Even if you think salary multiples have some legitimacy as a measure of housing affordability, the figure is now down to 4.34 across the UK, according to the Halifax. In the South-east, the salary multiple is 4.89, which is actually *below* its long-term average of 5.34. In Greater London, salary multiples are almost exatly the same as the long-term average of 4.52 (source: http://www.lloydsbankinggroup.com/media1/research/halifax_hpi.asp).

    However I accept that in a downturn there is a risk of prices dropping below their long-term affordability measure, as they did in the 1990s, as low as 3.0 in 1996. People often forget that the 90s recession took 10-11 years before prices returned to their 1989 peak.

    Report on 09 October 2009  |  Love thisLove  0 loves

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