Is the housing market on borrowed time?

31st July 2012

House prices have fallen for the first time in seven months, according to the figures published today. Prices fell by 0.1 per cent in July, with drops in every region except London, reports This is Money.

Even prices in London and the South East, which tend to be more resilient and have been keeping average prices up, saw growth slow to just 0.1 per cent.

Meanwhile, there are reports that, according to the Bank of England, the number of mortgages approved for house purchases fell to an 18-month low in June. Lloyds setting aside £5 billion for first-time buyers seems to offer little hope of an upturn.

And as Mindful Money's economist blogger Shaun Richards points out, income growth has failed to support the growth in house prices for some time.

According to Hometrack, over the whole period 1949-2012 UK GDP growth has averaged 2.3% compared to 2.6% for real household income growth. However, if you look at GDP and real household income growth since 2000 this has shown average growth of between 1.5% and 1.7% – much lower than the long term average.

He says: "This looks ominous for the UK housing market going forwards as a squeeze on real incomes is likely to lead to a squeeze on house price affordability." Even if inflation has reduced the bit of this, there seems little support for house price recovery.

PieterC comments on Shaun Richard's blog post: "Given the amount of support for the housing market through low interest rates, foreclosure delays, interest only payments etc. etc., and the real earnings position, it would seem that unless things improve rapidly, the market is on "borrowed time"

"It could well be that the Armageddon Report's view that house prices have a further 20% to fall is correct."

Economists have already predicted doom and gloom for this year. Howard Archer, of IHS Global Insight, predicted  the average house price to fall 10% by the end of the year while consultancy Capital Economics, believes prices could fall by up to 20% by the end of 2012.

However, Jan comments on Shaun Richards' post: "The only reliable figures to use are the figures from the Land Registry of sold prices.  Sellers can ask what they like but the only thing which counts is the price properties sell for."

But last week's Land Registry house price index found that homes worth £1m or more – typically found in London – slumped 43% from 825 to 468 in the year to April.

Jusamug comments on the Guardian piece: "When you look at the house prices to uk earnings ratio the picture is not pretty.

"We are still a long way from the long run average (1990-2012) even after the drop in house prices after 2008. The government might try pumping some credit into the market, but this doesn't make houses any more affordable. Our housing stock is over-evaluated and out of reach of average wage earners.

"Householders are too much in debt, and for many their only hope is that the value in their houses doesn't decay further…"

There are some familiar themes developing and continuing. The gap between the official interest rate and the reality of the mortgage market is widening with rates creeping upwards. For example, the price of new fixed rate mortgages has risen even faster as they have seen a rise from an average of 3.82% in January to 4.17% in June.

So what does the future holds? And do you think house prices are of importance? Share your view here.


More on Mindful Money:

What is the state of the UK housing market? And where is it going?

How to stay on top of the property market

House Price Crash: Wisdom of Crowds or Digital Maoism?

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