House prices heading for double-dip

by Cliff D'Arcy on 19 June 2010  |  36 comments
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After their weak spring bounce, Cliff D’Arcy warns house prices are set to head south...

Good news: homes became slightly more affordable last month, as house prices fell for the third month in a row.

Housing market cools off

The only UK house-price index based upon every residential property transaction in England and Wales is AcadHPI, produced by analysts Acadametrics.

AcadHPI trails behind the house-price indices produced by Halifax and Nationwide BS, as it tracks transactions, rather than mortgage offers.

Here are the AcadHPI data since the start of 2010:

As you can see, the housing market stalled in May, partly due to the number of sales diving 18% from April.

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Then again, the average house price in May was still well ahead of that recorded 12 months earlier. This annual rate of change peaked in March 2010 and has since declined.

Overall, the average house price in England and Wales remains 5% below Acadametrics’ February 2008 peak of £231,828.

Ten threats to house prices

In my view, this recent weakness could well be the start of another sustained decline in house prices (a so-called ‘double-dip’). This is because the housing market will be hit by a toxic combination of events which will undermine future house-price growth.

The housing market faces these ten headwinds:

1. From 21 May, the government scrapped expensive and unnecessary Home Information Packs (HIPs), making it easier for owners to put their homes on the market. Without increased demand, a rise in sellers will push down prices.
2. In the emergency Budget on Tuesday, 22 June, the government is expected to increase the rate of Capital Gains Tax (CGT) from its current 18%. Owners of buy-to-let properties, second homes and holiday lets could be liable for up to 40% tax on their property gains. This could trigger a rush to sell in the run-up to April 2011, further driving down prices.
3. At the end of April, public sector net debt hit £893.4 billion, up £138 billion on the £755.4 billion owed a year earlier. This leaves the coalition government with no choice but to cut public spending and raise taxes. This will increase unemployment and reduce disposable incomes, making houses less affordable.
4. Although the mortgage famine has eased over the past 12 months, getting a home loan is still much harder than it was before the credit crunch hit. The days of the 130%, 125% or even 100% loan are gone, but even a 10% deposit gives you a limited number of home loans from which to choose. This makes things tough for first-time buyers, weakening the housing ladder’s first rung.
5. In my view, the housing market is caught up in a ‘phoney war,’ with a low level of transactions artificially strengthening a weak market. Sales of properties costing £40,000+ are running at a third of their peak of nearly 140,000 a month in 2006/07. Indeed, sales in May (usually a bumper month) were the lowest for the month for 15 years.
6. Buyers who entered at the top of the market between 2006 and 2008 face payment shock when their short-term fixed-rate or discounted-rate deals end. Low, no or negative equity will leave some unable to remortgage to a low rate.
7. In addition, mortgage lending is running well below the levels required for a healthy, rising market. At its peak, our mortgage debt was growing by £10 billion a month, fuelling the house-price boom. In the first four months of this year, net lending has crept up by £3.8 billion -- far too low to support sustained growth.
8. The withdrawal of liquidity support provided by the Bank of England will give lenders a huge headache. Ten months from now, banks will begin repaying the £300 billion of emergency funding provided by the Special Liquidity Scheme (SLS) and Credit Guarantee Scheme (CGS). This will curb their ability to lend yet further.
9. Consumer confidence in the housing-market recovery is weakening. Under half (45%) of consumers think that now is a good time to buy property, according to the latest Property Tracker survey from the Building Societies Association. This indicator has slipped from 49% in March.
10. Jeremy Grantham --founder and chief strategist of trillion-dollar investment manager GMO -- has identified 34 historic bubbles, 32 of which have since burst. Only two bubbles remain: the UK and Australian housing markets.

Finally, when the Bank of England is forced to raise its base rate in order to rein in above-target inflation, then mortgage rates will start to rise once more. At this point, the stoutest prop supporting the housing market will be kicked away, which could lead to steep falls in prices. Watch this space...

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