Stunning house price fall in September

by Ed Bowsher on 07 October 2010  |  8 comments
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House prices dropped by 3.6% in September. I expect prices to carry on falling in 2011.

Making house price forecasts is a dangerous game. Events can easily prove you wrong. In fact, my friend Neil Faulkner thinks house price forecasts are pointless.

But heck, a year ago I said that house prices would fall in 2010, and so far at least, I’ve been proven right. So I’m going to shout about it!

Halifax published the latest instalment of its monthly house price index today and the figure for September was stunningly high. House prices have fallen 3.6% in just one month! Since January, they’ve fallen 4.4%.

Now I should admit that the quarterly fall was much more modest at 0.9% and September will probably prove to be a blip in terms of the size – but not the direction - of the monthly fall. However, my strong belief is that we’re going to see a downwards trend over the next year. I think there are four main reasons for this:

-          I suspect people still haven’t realised quite how tough the government’s austerity programme is going to be. Job losses, pay cuts and declining consumer confidence is bound to push down prices.

-          Interest rates may start to edge up next year. Families who have been able to just keep afloat thanks to a 0.5% base rate may have to sell if rates rise.

-          The mortgage market will remain tight.

-          The house price/earnings ratio still looks high at 4.56. In other words, the average house is worth 4.56 times the average annual wage for full time male employees. The long-term average is more like 3.5.

I know that I’ll get stick for daring to mention the house price/earnings ratio. I’m often told that it’s an obsolete metric because it doesn’t reflect the increased participation of women in the workforce. There’s something in that view but the ratio is a nice, simple way of looking at affordability. What’s more, I think it passes the ‘does it make sense?’ test. It’s very hard for youngsters to afford a home – that means that house prices aren’t sufficiently affordable.

Prepare for further falls....