House prices will carry on falling

by Ed Bowsher on 06 March 2009  |  0 comments
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New data from Halifax suggests that house prices have further to fall.

A month ago, Halifax issued a surprising press release reporting that house prices had risen 1.9% in January. Given the stormy economic climate, that seemed very odd, and, in fairness, Halifax did warn that the rise was probably a blip.

Today, Halifax confirmed that the true house price trend is downwards. UK house prices fell 2.3% in February. Over the last three months, the fall was 3.6%. No surprise there.

Ratio

The really interesting part of the release was on the house price/earnings ratio. This ratio compares the price of the average UK home to average earnings for full-time male employees.

According to Halifax, the ratio has fallen from 5.56 a year ago to 4.42. In other words, the average home is now selling for 4.4 times average earnings.

As house prices fall, you'd normally expect the ratio to fall too, but the crucial point is that the ratio is probably going to fall further from here. The long-term average for the house price/earnings ratio is 4.0, so even now house prices are at an above average level.

What's more, markets often 'overshoot.' In other words, prices can rise too high in a boom as excitement and a fear of 'missing out' causes some buyers to pay ridiculously high prices. And at the bottom of a bust, some terrified sellers will take whatever they're offered.

Yes, keen property investors will point to structural issues such as a shortage of housing stock in the UK. They'll also remind us that estate agents report rising numbers of enquiries by potential buyers.

My reply is that we're in the middle of a serious recession and mortgage finance is tight. In that environment, many potential purchasers will have to accept reality and stay put.

So I reckon there's a decent chance that the ratio will fall below 4 before too long. As I've said before,  property bargain hunters don't need to rush out just yet.

Get free advice from a mortgage broker at lovemoney.com

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