Jeff Salway: Making the numbers add up is only possible with lower prices

Published on Friday 6 November 2009 19:19

AS I was told with depressing regularity at school, the numbers just don't add up.

A cursory glance at the most recent house-price headlines suggests property values are well on their way to regaining the ground lost over the past 18 months or so. In the past week, Halifax, Nationwide and Hometrack have all reported UK house-price hikes for October, by 1.2, 0.4 and 0.2 per cent respectively. And mortgage approvals reached 56,000 in September, the highest level since March 2008, according to the most recent Bank of England figures.

In that case, why are so many experts predicting another drop in house prices over the next year? Even those reporting the latest price jumps were careful to add a note of caution to their numbers. Nationwide chief economist Martin Gahbauer said it was "difficult to imagine the housing market returning to the buoyant levels of activity and price inflation" that prevailed prior to the credit crunch, while Hometrack director of research Richard Donnell said that buyer interest was clearly slowing.

Meanwhile, economists are lining up to dismiss the value growth of the past few months as a false dawn. Howard Archer, at IHS Global Insight, believes prices will be 5 per cent below the current level at the end of 2010, while Capital Economics – traditionally bearish but often bang on the money – predicts a 10 per cent drop next year, followed by a further 5 per cent decline in 2011. Even more bearish is the Fitch ratings agency, which reckons on another 20 per cent slump in prices, pointing out the UK's average house-price-to-income ratio remains well above the long-term average.

All very different from the upbeat noises emanating from surveyors and estate agents in recent weeks. So what's with the caution? Rising unemployment, restricted lending criteria, a supply/demand imbalance and low wage inflation are all fundamental reasons why we can expect further price falls.

What is already evident is the pent-up demand that, allied to a lack of supply, drove the market up over the summer months has subsided in the face of higher prices and fewer bargains. The shortage of sellers was the biggest single factor pushing prices up, but that imbalance is being redressed with each indication of stability that encourages sellers back to the market. As they return, the economists reckon, the balance will gradually tilt back in favour of buyers and prices will drop again.

Then there are the difficulties facing lenders. Lending criteria have loosened slightly in recent weeks, but affordable loans for buyers with deposits of 10 per cent or less remain in very short supply, stifling the first-time buyer demand so crucial to any housing market recovery. That is unlikely to change until lenders have truly regained confidence in the wider economy. But, under international rules introduced last year, the higher the proportion of the property value being loaned, the greater the capital lenders must set aside as a safety net. They will remain cautious for some time, so first-timer numbers will remain subdued.

So house prices may well slip back and homeowners may despair, but for first-time buyers and for our longer-term economic welfare, prices need to keep dropping. The UK needs a housing market in which first-time buyers can enter the market without overstretching themselves, and that means prices returning to realistic levels at which a deposit of 10 per cent or more isn't out of reach for those without access to a generous Bank of Mum and Dad, but willing to save money.

Only then will the numbers add up.