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When will the housing market recover?

Created:
14 October 2008
Updated:
21 October 2008
Written by:
Faith Glasgow

Recent apocalyptic events in the turbulent financial markets, both in the UK and in the US, may have distracted attention from the gloomy and deteriorating state of the UK housing market, but they certainly have not improved the situation.

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In the monthly house price index from property website Rightmove (the first to be released; those from the Nationwide and Halifax are not available until the end of the month), commercial director Miles Shipside describes the financial sector's woes as "a further blow for a housing market where activity levels had shown signs of bottoming out".

The Rightmove index shows a price fall of 1 per cent over the month to mid September, and - more worryingly - the lowest number of new listings per estate agent since the index began in 2002.

Mortgage misery

"The housing market is in limbo and will remain so until financial institutions address the disastrous state of the mortgage funding markets," predicts Mr Shipside. "We are now seeing the lowest level of new sellers for years. While this market provides a good opportunity to trade up, it requires a degree of bravery in the face of the ongoing turmoil in the financial markets."

It's not just a matter of dwindling consumer confidence. The newly released BBA (British Bankers' Association) mortgage lending data for August showed that the number of mortgage approvals has fallen by 64 per cent on the year to date, and now stands at a record low. Commenting on the figures, RICS chief economist Simon Rubinsohn points to earlier uncertainty about the possible relaxation of stamp duty by the UK government, which acted as a further brake on transactions as buyers waited to see what happened.

The government's recent decision to raise the stamp duty threshold to £175,000, Rubinsohn says, should have helped bolster interest in the housing market this month, but these developments are likely to have been overshadowed by concerns stemming from the turmoil in financial markets.

Richard Donnell, director of housing market analyst Hometrack, says: "The previous housing cycle was ended by a combination of economic and interest rate factors; but now the whole fabric of the financial industry is in question."

"It affects mortgage availability - around 50 per cent of all mortgage lending in 2007 was at a loan to value of more than 80 per cent, so that's the borrowing level where the big squeeze in mortgages has been felt. But it also dampens confidence - people are less willing to move because they are worried about jobs and the economy, and there has been so much moving in recent years that most of them don't actually need to move now. There's hardly any pent-up demand at present."

Is there any crumb of comfort that a recovery in the markets could begin sooner rather than later? Not any more, according to most commentators. "There were some tentative signs in early September that things might be starting to pick up - viewing applications were up a bit, for instance - but the bank crisis has set them right back," comments Liam Bailey, head of research at property consultant Knight Frank.

Beyond the gloom

However, its rival, Savills, did stick its neck out just before the financial crisis intensified, with a forecast of when and where the eventual upturn is likely to start, and the length of time it could take to infiltrate the UK.

The pick-up, according to Savills' recovery map, should begin once lending conditions start to improve, probably early in 2010. London and the South East will lead the upturn in prices, with a return to pre-slump values by 2012; the South West, East Midlands and East of England will follow by 2013 and West Midlands by 2014. Wales, Yorkshire and the North West will take until 2015 to regain 2007 values, and Northern Ireland and the North East are likely to need until 2016.

By 2020, adds Yolande Barnes, Savills director of research, property values in the South East will be on average almost 80 per cent higher than they are now; in contrast, values in the North East will be just 20 per cent up on today's levels.

How far have those predictions been distorted by the subsequent banking meltdown, does she think? "We had forecast a fall of 25 per cent in prices as a direct result of a two-year credit crisis; we're half way through that now and we've just had another spate of bank failures," she says. "We anticipated a short sharp recession with around six months of negative growth, and a moderate rise in unemployment, though less serious than the one that occurred in the early 1990s. But there's an increased risk that the downturn could spread beyond the finance and property industries, into the wider economy."

Ms Barnes believes that if the credit crisis and recession are more prolonged and painful than anticipated, the danger is not that prices will continue to freefall, but that the housing market, having fallen by a quarter or 30 per cent, could simply 'bump along the bottom' for an additional year, or two, or three.

Remember supply and demand?

She emphasises that the present price slump is not, as many property experts believe, 'a much needed and long overdue correction' for an overheated market, but a reaction to the disappearance of mortgage choices, compounded by the wider economic slowdown. Once mortgage lenders start to operate more normally, the fundamental demand and supply imbalances within the market will kick in again and prices will start heading back upwards.

"The underlying driver is still a shortage of supply," she says. "First, right now, buyers can't find the right house in the right place at the right price because people aren't bothering to sell if they don't have to. Secondly, in the longer term, the construction industry has been decimated: completions will be very low for a long time to come. On the demand side, many people, especially in the south, still have a lot of household purchasing power, and a lot of equity in their houses, but there is a general lack of credit availability holding them back."

Recovery opportunities

When the housing market does finally bottom out and start to recover, there could be opportunities worth considering.

• While prices continue to fall, if you're moving to an area where prices have fallen more dramatically - for instance, from the UK to parts of Spain - you could find that even though you had to take a hit on the value of your home compared with pre-slump levels, the price differentials between the two destinations have worked in your favour.

• People may also be able to exploit the recovery time lag in coming years, for example by moving out of the South East around 2013 (by which time values, according to Savills, may have returned to pre-slump levels) and heading for, say, the Midlands, where price recovery is likely to be far less advanced.

• Keep an eye on yields if you have a mind to invest, says Ms Barnes. "Rental yields have risen on the back of falling prices, coupled with upward pressure on rents as people who cannot buy turn to renting. Yields may be starting to look very attractive by next year, attracting corporate and international investors as well as private landlords."

HOUSING RECOVERY: EXPERT OPINIONS

Richard Donnell, Hometrack

"Buyers will need to see real value in their local markets before they start buying, and the repricing process is still likely to take 12 to 24 months to work through. Then the finance must be available, and people will need the confidence to move; so several elements of recovery will need to come together. They might well be triggered by an external factor such as the next election, which could happen as early as spring 2010.

"We will see some recovery in pent-up demand, and therefore in transaction volumes, before we see prices start to move, but that the number of transactions will remain under a million for the next three years (it was 1.3 million in 2007). This is not an interest rate issue."

Liam Bailey, Knight Frank

"Most commentators agree that prices are going to fall between 25 and 35 per cent from last year's peak, and that the bottom should be reached by 2010, but we're likely to see a recovery in sales volumes rather than prices at that point. If base rates fall by as much as 2 per cent, which they may have done by this time next year, that could help bring forward the recovery in sales volumes, but it won't affect prices.

"London will hit bottom and start its recovery first, but it could take five or six years to ripple out further afield. Scotland is a much less volatile market, so it will also see an upturn much sooner; at the other end of the spectrum, Northern Ireland prices could lose 50 per cent from their peak over the next year or so. But it will be 2013 for London, and more generally 2014 to 2016 before prices are back to 2007 levels."

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