House prices are going to crash again

by Cliff D'Arcy on 11 May 2010  |  22 comments
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Feeble lending so far in 2010 suggests that house prices are set to crash once more...

During the housing market’s boom years, house prices rose relentlessly. Indeed, UK house prices rose every year from 1995 to 2007. Then along came the credit crunch to put an end to this winning streak.

The great mortgage boom

Of course, in order for house prices to rocket, so too must mortgage lending. As you can see from the table below, our total mortgage debt tripled during an incredible boom in credit:

Source: Bank of England, Lending to Individuals

The table above shows that between 1995 and 2007, the UK’s total mortgage debt increased from £390 billion to £1,186 billion. In other words, it more than tripled in the space of just 12 years.

During the boom years of the Noughties, our total mortgage debt grew steeply, growing by between 8% a year (in 2000) and 15% a year (in 2003). At the dizzying peak of the housing bubble in 2006/07, mortgage debt was rising by almost £10 billion a month.

What about today?

So far, we can see that strongly rising mortgage lending goes hand in hand with lively growth in house prices. Now here’s the post-boom increase in mortgage lending:

Source: Bank of England, Lending to Individuals

As you can see, the total increase in mortgage lending during 2009 was just £9 billion. That’s less than a single month’s increase during 2006/07. In fact, 2009’s £9 billion increase in mortgage lending was lower than in any year since 1987, when the Bank of England’s quarterly mortgage-lending data began.

Looking at these figures, it’s entirely possible that growth in mortgage lending in 2010 will be zero or even negative. If we compared it to the boom years, mortgage lending today is as dead as a dodo!

Where’s the spring bounce?

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During the spring months, mortgage lending and house prices frequently rise, largely because many home-movers like to leap into a new home between March and May. Alas, the bad news for house-price bulls (optimists) is that mortgage lending in March was very, very sluggish.

According to the Bank of England, net mortgage lending rose by a feeble £318 million in March -- roughly a sixth of the £1.8 billion increase reported in February. Furthermore, that’s just a thirtieth (3.3%) of the peak £10 billion-a-month increases of 2006/07.

Not only was mortgage lending weak in March, but the number of approvals (new home loans granted) was disappointingly low. Although approvals rose to 48,901 in March from 46,882 in February, this is a poor show for this time of year. At their peak, mortgage approvals were running at almost three times their current level -- close to 135,000 a month.

In addition, approvals in the first quarter of this year were the lowest for any first quarter, bar 2009.

• Read this blog: Is now a good time to buy for first-time buyers?

We’re in a false market!

Put simply, continued rationing of mortgages suggests that the outlook is grim for the housing market. This situation will worsen from April 2011, when banks must start to repay the £300 billion of emergency funding provided by the Bank of England’s Special Liquidity Scheme (SLS) and Credit Guarantee Scheme (CGS).

To me, the housing crash which ended last spring remains unfinished business. The main support for the housing market is ultra-low interest rates, but these will rise eventually. In addition, today’s false market is being propped up by a very low number of transactions, with price rises largely coming from London and the South East.

In summary, the stage is all set for the next house-price slump. Clearly, the 1995-2007 housing bubble has a long way to go before it has properly deflated. Indeed, the next slump could be worse than that of 2007/09, so expect house prices to flatten and then fall later this year...

• Watch this video: 3 ways to boost your home’s value

More: Your home’s value is about to drop | Make this mistake and lose £66,424

At lovemoney.com, you can research all the best deals using our online mortgage service, or speak directly to a whole-of-market, no-fee lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.