Why house prices will fall in 2011

by John Fitzsimons on 31 December 2010  |  18 comments
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Next year will be a tough for home prices.

The end of the year is usually a time of optimism. You can look forward to a clean slate, to 12 months of learning from your mistakes. You will go to the gym every week, you will pay money into your pension, you will ditch that expensive petrol-guzzling people carrier for a more efficient model.

But there’s not much optimism to be found in the property market.

2011 – a bad year for vendors?

Earlier this month property portal Rightmove published its latest house price index, highlighting that five of the last six months have seen sellers cut asking prices, with the latest cut of 3% (the equivalent of nearly £7,000 on average).

According to the firm, prices have already fallen by 6.5% since June, with a further 5% fall expected next year, though this prediction is based on a significant increase in the number of repossessions. If repossessions do not rise sharply, then Rightmove reckons property prices will remain static over 2011.

Rightmove is not alone in expecting a tough 2011. Estate agents Savills, Hamptons and CBRE have all warned of, at best, moderately falling property prices in the year to come.

Let’s take a look at why so many experts are downbeat about 2011.

Overpriced property

When the credit crunch first hit, there was talk of a sharp correction in property prices of 25% plus. Prices had reached a level where borrowers were borrowing four or even five times their annual salary in order to buy, a level the housing market sceptics declared was completely unsustainable.

And while house prices did drop, the drop was nowhere near as sharp and protracted as expected. While recent falls have pretty much eradicated the gains made since Spring 2009, property remains far too expensive in the eyes of many – according to the latest Property Tracker Index from the Building Societies Association found that nearly two in five (38%) felt property in their area was over-priced, with 25% believing the property was overpriced by 10% or more!

Many vendors are only too aware that the prices they are trying to get for their properties are too high. That’s exactly why asking prices have fallen so consistently since the summer. For many who would like to buy, they will have to fall a fair bit before they are willing to part with their cash.

Getting the cash

This should all be great news for those looking to take their first steps onto the ladder. Sadly it doesn’t necessarily work like that.

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A property, as with any asset, is only really worth whatever a buyer is willing to pay for it. And potential buyers have had their hands forced somewhat with the contraction in mortgage lending. Put simply, even if buyers would be happy to pay more for certain homes, they can’t as lenders aren’t willing to lend as much as they were a few years ago.

The Council of Mortgage Lenders (CML) has confirmed that for the last couple of months, gross mortgage lending levels have been at decade lows. It’s mighty difficult to buy a property if banks and building societies aren’t that keen on giving you a mortgage.

And they don’t think it’s going to get better anytime soon. The CML reckons gross mortgage lending for 2011 will reach just £135bn, the same figure it reckons 2010 will finish on. To put that into context, in 2009 gross mortgage lending was £143bn, and in 2008 it totalled a mighty £253bn.

Mortgage lending is tough, and it’s not about to get any easier.

Moving the goalposts

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And that’s before we even consider the regulatory changes that the FSA wants to see come in, changes which will make it far harder for borrowers to access mortgage funding. Even the Housing Minister reckons he’ll struggle to get a mortgage if the changes are approved!

If you want to find out more, be sure to have a read of Safer mortgages mean lower house prices!

There are also things like rising unemployment as government cuts, and potential increases in interest rates to consider, factors which may lead to a rise in repossessions and forced sales, which only serves to further push prices downwards.

But we live on an island!

Of course, there are certain fundamentals behind the UK housing market which will always present a compelling case as to why house prices should rise.

There’s still plenty of demand – we are after all a nation where home ownership is seen as essential. According to the BSA report, 59% of respondents said they would buy now or within the next year if they had the resources, while the National Association of Estate Agents has reported a recent rise in the average number of potential buyers registered with member agencies from 218 to 241.

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And supply, while on the rise in recent months, is still horrendous – the National Housing Federation confirmed that over the past eight years, every single region of the UK missed its housebuilding targets. The new government has unveiled a Localism Bill which it reckons will revolutionise homebuilding in this country, but even if it does, it will take a while before we see the results.

With a finite amount of space, there are only so many homes that can be built anyway.

Every town is different

And anyway, different towns (and different properties within those towns) will enjoy different fortunes anyway.

London, for example, operates in essentially a different market place to the rest of the country. Just because property in NW1 is having a great time of it doesn’t mask the fact that other areas may be suffering badly.

What we know will happen

Of course, all of the experts could be completely wrong – it wouldn’t be the first time. Perhaps the economy will stage a strong recovery and as a result confidence takes off, and we all get buying again. Or perhaps the falls will be even worse than expected and we descend into the crash that plenty of people expected a couple of years ago.

All that anyone can say with certainty is that those people who buy their home as a place to live in are less likely to be disappointed than those who buy with one eye always on the lookout for the next house price index.

Tell us your predictions

What are your predictions for house prices in 2011? Tell us what you think will happen, using the comments box below!

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