Assetz® News - Assetz House Price Watch July 2008

Assetz House Price Watch July 2008

25th July 2008 |

Assetz House Price Watch is the only fully inclusive summary of all the major UK house price indices, providing a comprehensive overview of market activity.

July 08: buyers with mortgages forced to haggle on HOUSE prices, following raw deal from lenders
· Average rate of annual growth in June 2008 was -1.5%, down from +0.1% in May 2008
· Average price of a home in June was £207,564, down £2,015 from £209,579 in May 2008

· Average home price fell by £4,375 in a year from £211,939 in June 2007

The five major house price indices show an average of -1.5% annualised growth for the twelve months prior to June 2008. This shows a decline in the annual rate of growth recorded last month (+0.1%) and a 13% decrease from the June 2007 annual growth rate of 11.5%.

Annual house price growth declined for the tenth consecutive month in June, entering a period of negative growth for the first time since Assetz House Price Watch began in 2005. However, Assetz believes this is a temporary correction in the market rather than a crash, and prices will begin to level off in the autumn before starting to climb again in the second half of 2009.

The average house price in June 2008, taken from the average price provided by all five major UK indices, showed a decrease of £2,015, compared with the previous month's average figure and a fall of £4,375 in the twelve months from June 2007, when the average price of a home was £211,939.

Buyers with mortgages get raw deal from lenders...

Both Halifax and Nationwide have significantly raised their mortgage rates recently to boost their profits while transactions fall, which has resulted in purchasers haggling down property prices by a few per cent to compensate for their increased costs. Rates are still high, despite recent rate cuts and availability remains tightly restricted.

This explains why Halifax and Nationwide house price data is noticeably lower than the other indices, which are based on the whole of market land registry data (FT and CLG) or asking prices (Rightmove). See Graph 3. Indeed, there is evidence that Rightmove recorded asking prices show sellers putting up asking prices, in anticipation of negotiation later by the purchaser.

Supply and demand imbalance worsens...

Evidence of the vast imbalance between supply and demand in the UK property market is clear to see, with the sharp rise in rents over the last few months demonstrating how excess housing demand has moved temporarily away from purchasing into rentals.

This imbalance is worse than ever, as housebuilders batten down the hatches and cease operation on thousands of new developments across the country. The NHBC reports this month that housing starts are down to just 20,973 in the three months from April to June 08, a 51% decrease on the same period last year. As staff are laid off and investment stalls, the potential knock on effect becomes more dramatic, as the potential recovery time for the industry grows.

There is now no chance of the Government meeting its already ambitious target of 200,000 new homes in the South East alone by 2016, which will lead to even greater house price rises in the long term.

Mortgage market needs injection of funds...

The key factor which will drive the recovery of housebuilding starts is an injection of funds in one form or another from the Bank of England into the stagnant mortgage market. Once lenders begin offering mortgages again, there will be a surge of demand from first time buyers in particular, who are still keen to buy but can't raise the huge deposits currently required.

Interest rates must fall...

While the dangers of inflation are plain to see, they are externally driven through energy and food prices and not internally driven so far. The turmoil in the housebuilding industry and the long-lasting damage being done to the Government's housebuilding targets is potentially devastating. Inflationary pressures are likely to reduce significantly next year as the economy edges towards recession, so in the short term, the Bank of England should focus on boosting the economy and the ailing housing market at the centre of consumer confidence, with a cut in interest rates over the next 6 months to a 3.5% level.

Stuart Law, Chief Executive of Assetz, comments:

“The impact of excessive mortgage rate increases on the mortgage related market has been considerably more dramatic than the effect of the credit crunch on the wider market. Mortgage lenders such as Nationwide and Halifax did not pass April's interest rate cut on to consumers and have continued ever since to hike their mortgage costs to increase their own margins, while transactions are low. Only in the last week or two have we begun to see a slight reduction in rates again and that cannot be considered permanent as yet.

"This profiteering must stop to create a fairer deal for homebuyers, who are unfairly paying for the excesses and errors in the investment banking sector over the last few years. Rate cuts from lenders coupled with Bank of England Base Rate cuts and an injection of capital by one route or another from the Bank of England, would bring some liquidity and consumer confidence to the mortgage market.

"Dropping Bank of England base rates to 3.5% for a period should drive down mortgage rates payable even if banks retain high margins. Given consumer nervousness at present, the material saving in their mortgage bills could be perceived to offset the increase in energy and food bills, alleviating pay increase pressures that are building. Pay increases present the real danger, as they will drive genuine local inflation and in turn lead to interest rate increases in the future, rather than decreases.

"Many experienced buy to let investors, meanwhile, are benefiting from the current conditions. They are no longer competing with first time buyers at the lower end of the market, and so are benefiting from lower prices and an increased rental demand. Seasoned investors rely on rental income rather than capital growth alone, and do not need to sell in the short term. They are prepared to ride out the correction and allow the market to recover, whilst adding to their portfolios as new opportunities arise from forced sales.

"Once the housebuilding industry loses its capacity through job losses it will take years to rebuild, which will cause a crisis in supply levels that will strongly support property price growth in the next few years, once the remainder of new build stock is sold."

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/4304.html. Alternatively, please see our full press release archive.