Will a slump follow the property price slowdown?
By Chris Gilchrist 31st October
2007
The numbers now show without any question that the UK housing market is slowing.
But is this the first stage of a slump, or will we have the soft landing predicted
by lenders and estate agents?
All the major house price indices- Nationwide, Halifax and Land Registry- are now
decelerating. Nationwide reckons the annual rate of house price growth has dropped
to 9.3%, while the Land Registry reckons average prices rose just 0.4% in September.
There’s a lot more in the pipeline. The last two interest rate rises and a tightening
of lending criteria have certainly reduced demand: the surveyors report that new
buyer enquiries have fallen for 11 months in a row. That’s not surprising, given
the universal agreement that houses in the UK are less affordable than they have
ever been.
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HIPs slow the slide
Perhaps it was fortunate that the introduction of Home Information Packs caused
more people to keep their properties off the market. Over the summer there was a
sharp fall in the number of new sale instructions received by estate agents, and
without this there might have been more downward pressure on prices.
Estate agents and mortgage lenders are not naturally pessimistic. But even RICS
expects a ‘subdued’ market in 2008 with no change in house prices. The Council of
Mortgage Lenders is more upbeat, expecting mortgage lending to fall only from £360
billion to £340 billion next year, but with a 1% fall in house prices. This, though,
assumes a cut in interest rates of 0.75% over the year, and it’s questionable whether
the Bank of England will cut rates that fast.
The CML also points out that 1.4 million households have short-term fixed rate mortgage
deal coming up for renewal in 2008. All will have to be refinanced at higher interest
rates. Possibly much higher interest rates, because if your credit status isn’t
top-notch, you may find it hard to refinance your loan with another lender, and
be forced to accept your existing lender’s sky-high Standard Variable Rate.
If HIPs deter sellers, that could prevent prices sliding. And so long as the economy
continues strong, it’s most unlikely there will be a big rise in repossessions next
year, since the majority of repos are usually triggered by unemployment.
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BTL is the joker
My view is that it’s buy-to-let that’s the joker in the pack. It accounts for almost
10% of the market, and more than that of transactions. Many BTL owners will, I predict,
decide to cash in their chips over the next year in response to the pressure of
rising interest rates.
At the moment, new-build BTL is priced at a premium of about 20% to older property,
and I expect this premium to disappear over the next year or so. The question is
how much effect the steady decline in prices in the new-build flat sector will have
on the rest of the market. Perhaps the effects will be rather localised, with house
prices falling most in areas with the largest recent supply of new-build.
But we’re in the realm of psychology here, since once an expectation of falling
prices takes hold, it can feed a downward spiral. My best guess is that 2008 will
see house prices fall by around 5%, but with big regional variations. Given the
huge rise in prices over the past six years, a decline of this order shouldn’t worry
the vast majority of homeowners.
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Article produced by EveryInvestor.co.uk
