Building Societies Association
House Prices in 2009
|
Contact: Joseph Thompson Date: 28 Jan 2009 |
Print page | Email |
Summary of 2008
In 2007 commentators predicted house prices would remain more or less flat in 2008, or experience a modest reduction. Prices actually dropped 15.9% according to Nationwide Building Society – the biggest annual fall on record. Unsurprisingly, forecasters, and in fact most interested onlookers did not anticipate problems in the credit markets continuing and developing as they did in 2008, and the impact this would have on the UK housing market which was already significantly overvalued.
As banks began to report huge losses on investments linked to sub-prime lending, the cost of borrowing on the interbank markets began to rise. After the collapse of Lehman Brothers in September 2008 the market all but froze as all confidence and trust evaporated. In a bid to keep balance sheets as healthy as possible, lenders tightened lending criteria and reduced their product ranges. House prices fell consistently throughout 2008 according to indices published by the Nationwide Building Society and Halifax Bank of Scotland. Demand for housing remained subdued as buyers anticipated further price falls, and the once buoyant buy-to-let market slowed considerably. Additional downward pressures on demand also surfaced as buyers backed away from the market faced with job uncertainty and mounting debt levels as household costs increased fuelled by rising commodity prices.
Forecasting house prices in 2009
The uncertainty experienced in 2008 is likely to continue in 2009 as the general economic outlook deteriorates, with the UK economy in recession. In these uncertain times, some industry observers have refrained from making predictions for 2009. The economic conditions faced in 2009 are somewhat unique and therefore forecasts are at greater risk of being inaccurate.
The table below summarises published forecasts for house price growth from January 2009 to December 2009:
The range in predictions differs somewhat between forecasters as seen in the chart above, however all forecasts point towards falling house prices.
The consensus forecast is for house prices to fall by 13%, with all commentators expecting house prices to experience further falls throughout 2009. Despite interest rates gravitating towards zero and affordability improving, the deterioration in the UK economy combined with restricted availability of credit will contribute to further house price falls in 2009.
Demand side factors
Fear over job security remains a key concern for many individuals and will keep demand for housing subdued. The BSA property tracker survey¹ identified job security as the primary restraint to property purchase, which is likely to be the case for 2009 as unemployment continues to rise. Significant job losses and salary reductions in the financial service sector will stifle demand further, as large bonus payments will no longer be available fund property purchases as investments. This will be particularly evident in South East England.
As house prices fall in 2009, and house price affordability improves, demand for housing may well recover. This is confirmed by findings in the BSA property tracker survey which shows a positive correlation between measures of affordability and the number of people that think it is a good time to buy. In addition, Interest rates are likely to be cut further in 2009, which should encourage borrowing in the mortgage markets, but could also have an adverse affect by further restricting the supply of funds, especially from retail deposits. As long as credit conditions remain tight, a number of barriers will prevent this demand increase giving the necessary signals to the market for a price recovery.
Barriers
1) Availability of mortgage finance: The number and volume of mortgages available is likely to remain low in 2009 as the wholesale money markets continue to operate ineffectively. In October 2008, only 3,281 mortgage products were available compared to over 10,000 the same period in 2007 (Moneyfacts² ), and this is not likely to improve in 2009.
2) Lending criteria have tightened: Lenders are less likely to accept borrowers without good credit ratings, and they will no longer offer mortgages with high loan to value (LTV) ratios. 25% of mortgages available in the UK to new borrowers now require a deposit of at least 40%, and 60% of all mortgages now carry a maximum LTV of 75%³.
3) House price expectations for 2009 are negative: Sentiment plays an extremely important role in the housing market, and potential buyers will refrain from entering the market until prices show some sign of stabilisation. This creates a self fulfilling downwards price spiral. This is especially true for buy-to-let investors who made up 10% of mortgages by the end of 2007. Just as speculation contributed to an overvalued market in recent years, the same speculation may lead to price decreases in 2009. Although many buy-to-let investors have a long term outlook, they may not invest until they sense that prices are levelling off, and will be unable to do so without a significant deposit.
Supply side factors
Support from the supply side may offer some reprieve for house prices in 2009. House building has struggled to keep up with demand in the past, and housing starts and completions are likely to be relatively low in 2009. This view is echoed by RICS who warn that the number of new homes being built is likely to shrink next year. RICS suggest new housing developments were likely to drop to around 80,000 in 2009 (note 4) . This contraction in supply should support house prices in 2009.
Yet there are other factors pulling in the opposite direction. Forced sales will increase in 2009 in line with rising unemployment, and in a stagnating market, sellers may be forced to offer very low prices to attract buyers. Mounting public pressure on lenders to explore every avenue before seeking a possession order, and increased government aid for vulnerable families may curtail this somewhat, however an increase in forced sales seems inevitable.
It is also interesting to note the potential effect of the rental market on house prices. On one hand, some commentators see an increase in rental prices, as potential buyers move to the rental market whilst they wait for a recovery. On the other, stagnation in the housing market may force homeowners to rent their properties, increasing rental supply, pushing down rental prices. There is also evidence of an oversupply of ‘new build’ properties in many city centres. Data from 2008 rentright.co.uk suggest rental prices are in a general downwards trend signaling that supply is outstripping demand. If this trend continues, it may add further downwards pressure on house prices, as renting becomes a more attractive substitute to house purchase. Furthermore, renting does not require any capital investment which is an attractive attribute in the current climate when concerns over personal finances are high.
Reaching a sustainable equilibrium
House prices will fall further in 2009, but at what rate remains uncertain. Despite being caused by unprecedented turmoil in the financial markets, a downwards price ‘correction’ has been on the cards for some time. Housing affordability reached an all time low at the end of 2008, and the current house price to earnings ratio of 5.08 is still above the long run average of 4.07, according to Halifax Bank of Scotland. In 2009 we can expect housing affordability to improve and the house price to earnings ratio to move closer towards its long run average.
The spread between three month Libor and the bank rate has gradually narrowed since Q3 2008 suggesting a greater willingness to lend, and that the perceived risk of lending has reduced. Yet this means little when the availability of credit remains so low. In a bid to increase liquidity, billions of pounds have been injected into the financial system followed by the introduction of a range of schemes aimed at increasing confidence and the capacity for lending.
Once credit conditions begin to normalise, and if market sentiment improves, it is possible house prices could stabilise. The Q4 Bank of England Credit Conditions survey found that demand for secured lending for house purchase had remained broadly stable in the last three months of 2008, in contrast to lenders’ expectations. If conditions do normalise, this ‘pent up demand’ could be realised, supporting price levels. Ultimately, the extent to which house prices will fall in 2009 will depend on how responsive the credit markets are to government initiatives, and for how long market sentiment remains negative.
References:
1. http://www.bsa.org.uk/mediacentre/press/bsa_property_tracker_dec08.htm
2. http://www.moneyfactsgroup.co.uk/press/pressreleases/displaypressrelease.asp?id=622
3. http://www.ifaonline.co.uk/public/showPage.html?page=ifa2006_articleimport&tempPageName=832777
4. http://www.guardian.co.uk/money/2008/dec/24/house-prices-mortgages
