House prices and home loans falling

Published on Thursday 29 July 2010 16:09

FEARS that the housing market is set for a new slump strengthened yesterday after new figures showed a decline in both house prices and mortgage lending.

The Nationwide revealed that UK house prices fell by 0.5 per cent in July, after a static June and several months of slowing increases. And the Bank of England reported that the number of mortgages approved by UK banks fell in June to its second lowest level since May 2009.

House prices are now just 6.6 per cent higher than a year ago, compared with 8.7 per cent in June and a peak 10.5 per cent in April, according to the Nationwide, supporting other downbeat data published this month.

The Halifax house price index fell for the third successive month in June, while the Royal Institution of Chartered Surveyors recently reported that buyer demand had slumped to its lowest point for two years.

Martin Gahbauer, chief economist at Nationwide, attributed the slowdown to a combination of reduced demand and an increase in the supply of homes for sale. Last year's house price inflation was driven largely by an excess of demand over supply that pushed up asking prices. However that is now being reversed as the uncertain economic outlook deters potential buyers from entering the market.

Mr Gahbauer said: "Despite the introduction of a second stamp duty holiday for the vast majority of first-time buyers and record low interest rates, the number of properties changing hands across the UK is still running at only half the levels seen prior to the financial crisis and recession," he said.

Mr Gahbauer added that it was unclear in which direction prices would go next. "It will take several more months to establish whether house prices are now simply oscillating around a flat price trend or whether a period of downward trending prices may be in store," he said.

Meanwhile the Bank of England has reported that the number of mortgages approved fell from 49,461 in May to 47,643 in June, compared to a recent peak of 58,995 last November and 6 per cent lower than the same month in 2009.

Leading economists said the figures published yesterday suggested that house prices would fall further over the coming months. Howard Archer, chief UK and European economist at IHS Global Insight, said the latest evidence of a weakened housing market reinforced his belief that house prices will fall over the remainder of 2010 and then soften further next year.

"Housing market activity is currently low, the economic fundamentals are far from ideal for the housing market (notably high unemployment and muted wage growth), a major fiscal squeeze is getting under way, and house price/earnings ratios have moved up overall from their early-2009 lows and are above their long-term averages," Mr Archer noted.

And Paul Diggle, property economist at Capital Economics, said that while mortgage approvals are unlikely to get much lower there is little prospect of a strong recovery.

"While weak lending did little to hold back the strong gains in house prices in 2009, we think that the fresh falls in house prices that appear to be getting under way now are consistent with the lack of mortgage lending," said Mr Diggle.

"With June's mortgage lending numbers not likely to feed fully through to house prices for another six months, further falls in prices for the remainder of this year are likely."