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House price bombshell
Hugo Duncan, City Correspondent08.04.08
A slump in house prices five times worse than expected rocked the property market today.
One senior commentator said prices could fall by more than 20 per cent over the next two years, putting the downturn on a par with the negative equity and repossessions crisis of the John Major years.
The 2.5 per cent fall in the Halifax index last month is the worst since September 1992 when property prices crashed. Up until today, Halifax was predicting prices would remain steady.
It was far more drastic than the 0.5 per cent decline feared by City economists and piles pressure on the Bank of England to cut interest rates on Thursday.
Analyst Seema Shah at Capital Economics described it as a "stunningly large drop", adding: "There is a clear risk that this housing market correction will be sharper and deeper than we currently expect."
Howard Archer, chief UK economist at Global Insight, said of the 2.5 per cent fall: "This is a very worrying figure and it comes before the latest escalation of the credit crunch."
While warning about putting too much emphasis on one piece of data, he said Global Insight had increased its forecast for house price falls this year and next, adding: "Risks are mounting of a substantially sharper drop. Indeed, there is now a very real danger that a drop of more than 20 per cent in house prices could occur over the next couple of years."
It comes as the number of houses sold in London hit its lowest level for more than a decade with sellers forced to slash between £70,000 to £250,000 off asking prices.
Liberal Democrat T reasury spokesman Vince Cable said worse was yet to come. And he warned of an " epidemic of repossessions" unless the Treasury acts to make sure homeowners were offered help by lenders to make payments affordable.
"These figures confirm that the market was overvalued and due a painful correction. But we are only at the early stages of a market fall," he said. "The wheels are clearly coming off Brown's economic wagon."
But Gordon Brown insisted that the UK was "better prepared" to deal with the latest economic woes than it was 15 years ago when interest rates hit 15 per cent, inflation 10 per cent and unemployment was rising rapidly.
He told the BBC: "We've seen house prices rise by about 180 per cent over the last 10 years and they have risen by about 18 per cent over the last three years, so a 2.5 per cent fall is something that is containable." There was more bad news for the property market when Abbey became the last mainstream lender to stop offering 100 per cent mortgages. It means first-time buyers will have to come up with a deposit of around £10,000.
Hundreds of mortgage deals have been scrapped in the past week.
Lenders are desperate to avoid "high risk" borrowers with small deposits so the turmoil in the market has had a disproportionate impact on first-time buyers. As well as pulling its 100 per cent mortgages, Abbey increased the cost of many of its fixed-term and tracker mortgages. Borrowers will need a deposit of at least five per cent unless they have a parental guarantee.
An Abbey spokesman said: "This is normal given the current market conditions and is in line with recent moves by other lenders." Lenders such as Alliance & Leicester, Britannia and Cheltenham & Gloucester are demanding deposits of 10 per cent. Nationwide recently raised its minimum deposit for its best deals from 10 to 25 per cent - or £62,500 on an average £250,000 first-time home in London.
Melanie Bien, director at mortgage broker Savills Private Finance, said: "This is a huge blow for first time buyers struggling to get on the housing ladder. Despite falling house prices in some areas, it is still extremely difficult for first-time buyers to save up enough of a deposit to buy their first home.
"The liquidity squeeze is encouraging lenders to opt for low-risk business over higher risk, and that means attracting people with big deposits or significant equity in their home."
Housing Minister Caroline Flint announced that the Treasury was calling in the Council of Mortgage Lenders to discuss action that needs to be taken. She said: "We have to make sure we keep our eye on what is happening."
But the council added to the gloom when it reported the number of home loans issued has slumped to its lowest for 16 years.
Reader views (18)
The market was due a correction and prices cooling off is a good thing if in moderate amounts. The market runs on confidence and fearful predictions quickly become self-fulfilling prophesies but houses have only ever been worth what people are willing to pay for them so we should not be so outraged at their apparent transformation from excellent to fickle investment.
The key thing is to not borrow excessive amounts (no more 100% mortgages is a good thing not a sign of doom). We live in a time where we expect to have it all without waiting or working for it, after all why save when the bank will lend you 100 or 110%? We just need to adapt our lifestyles (save more, be more careful with debt) and our mindsets (accept that we can't have it all - a great house, a new car, a widescreen TV etc) and we will find the credit crunch isn't as painful as we feared.
- Charlie, West London
Given that the Evening Standard is in the vast majority a paper for Greater London, why is it leading with the inflammatory line of a housing "bombshell" when in fact the prices for London have RISEN in the last three months? The nature of housing stock in London, with new builds relatively rare except in specific areas which are suffering such as Bow, and the continuing appeal of the city make London much less likely to be affected compared to cities such as Leeds and Manchester where huge new developments lie mostly empty.
Regional figures for the last quarter (% rise or fall)
The north: 1.2%
Yorkshire and the Humber: -0.5%
The north-west: -0.5%
The east Midlands: 2.2%
The West Midlands: -5.0%
East Anglia: 1.4%
The south-west: -2.6%
The south-east: 0.0%
Greater London: 1.6%
Wales: -4.7%
Scotland: 0.2%
Northern Ireland: -1.5%
- Chris Stephens, London, United Kingdom
The Halifax report clearly states that the 2.6% drop was a national average, skewed by 5% falls in the West Midlands and Wales, areas that historically have suffered low house prices and which clearly over corrected themselves in the recent boom and have subsequently fallen again quickly. The report went on to say that prices in Greater London had in fact risen by 1.6% in March.
The depressing thing is that the The Standard, which is a London centric newspaper, decided to run with the "shock, horror, massive house price drop" headline.
It is this type of reporting that is doing its best to talk us all into a recession.
- Shaun, London
Peter and Mr Burton
This is the first year on year fall i.e. March 2008 versus 2008, since January 1996. And the trend in London is clear, down, we are just playing catch up. Prices will go up and down month on month, but downwards is the trend.
The City is sacking lots of people, tourism is about to dive, retail sales are already doing so. Do you honestly think unemployment is going to remain low? When it rises sentiment will worsen even more.
Don't expect immigrants to save BTL. Since December they can work in other parts of the Euro (stronger currency and cheaper living costs). Their own economies are also doing well i.e. numbers are falling, even though all it would have taken is for them to merely not come.
Where I am asking prices have started to fall. Why? Because 90% of the houses I saw in August are still there. This is for 350k and under houses, an allegedly strong part of the London housing market. Wonder what BTL are thinking now prices are falling, leverage is working against them, payment rises are about to outpace rent rises. Sell now CGT rules have changed?
Oh, and in the 1990s London house prices fell by more than the rest in the end...over 30% in nominal terms and even more in real terms.
- Trevor, South east
While I sympathise with those caught in negative equity, it's been on the cards for years. Anyone who had been doing their research and following the market trend could see we were in a dangerous housing bubble that had to burst. Well, it has and I wouldn't be surprised to see falls of around 40% to return us to 'normal' prices. Estate agents who don't encourage vendors to lower prices and accept that we're in a buyers' market will go under - they rely on volume of sales, not the odd hundred pounds made per transaction.
And if anyone believes London is somehow 'immune', think again. The amount of speculative money in London property is far larger - it's more volatile and hence will crash in a big way. Just keep an eye on the amount of stock coming onto the market over the next month or so. It'll blow the 'supply and demand' argument out of the water, that's for sure.
- Cp, London UK
To Sohiab Rehman, London
I wonder what you studied; obviously not economics or you would have known that to buy just now is absolutely crazy. Much, much cheaper to rent and wait for the 30 per cent reductions which are up ahead.
- Mohammed Kareem, Hounslow
"...Another wheel falls of the amazing and stable economy. I guess I ll just have to turn to crime and it doesn't pay to work hard in this country...."
I guess that's about the long and short of it and has been for the last 10 years. You could go and work for Local Authority of course...
- Austin Tassletine, South West, UK
Mr Burton is spot on in his comment - the Standard have made no mention of the rise in London prices by 1.6%. Why? Because fear sells papers and it makes a much better front page story. Unfortunately doom & gloom stories can have a devasting impact on the whole of London's economy.
- Anil, London
My concern is what's going to happen to all of "the excess unregulated estate agents" that are going to be surplus to requirements very shortly?
What alternative industry are they going to migrate to and taint?
- Fraser, Telford Park
I have just purchased a house. Being 29 after racking up a student loan for my education, I now have to contend with negative equity. I'm not a buy to let investor and wanted a house to live in. Another wheel falls of the amazing and stable economy. I guess I ll just have to turn to crime and it doesn't pay to work hard in this country.
- Sohiab Rehman, London
John, Barnes in London writes that "I have a friend that works for a local agent and he says that prices have been coming down for last 5 months and actually a good time to buy."
Well I'm stunned. An estate agent saying its a good time to buy a house? Whatever next? Second-hand car salesman saying its a good time to buy a second-hand car?
I suspect the same agent was saying it was a good time to buy 5 months back... after all, you can't go wrong with property can you?
- Mart, London, UK
The only surprise to me is that according to the survey prices in London are increasing. Property prices are not rising in north west London - we have cut the asking price of our flat 3 times since January and still no serious offers. This market is getting worse and I suspect that the banks are reluctant to disclose how bad it is. I guess all the surveyors who issued optimistically high valuation reports are busy checking their indemnity policies before the law suits start to pile up.
- Beth Williams, London
In total agreement with Mr Burton. Commentators should always be aware that there is not one housing market in the UK. On the contrary, there are hundreds of quite localised markets. Sure, at the moment there is evidence of a National trend, but with the provinces being much harder hit than most of London and the South East.
- Mikey, London
Mr Burton, when London crashes, it will be brutal and will be far larger than the national average price drop (South East included). How do I know? I work in credit, I foresaw the mortgage tightening we have recently seen at the end of last year. Credit crisis is getting worse. You do not want to know what I am seeing at the moment..
- Paul, Claygate
It really isn't a blow for people who hope to become first-time buyers. Wait a year or two, save up a deposit, and you'll be in a much better position to buy a property at a much more sensible price. It's the people who bought for the first time in the past two years who are really suffering.
- Ollie, London
I have a friend that works for a local agent and he says that prices have been coming down for last 5 months and actually a good time to buy. Prices are lower and interest rates are lower than 6 months ago. Personally I am going to take advice and start looking for a home to buy. If you have a reasonable deposit then all should be fine surely.
- John, Barnes, United Kingdom
Has the author of this article actually read the house price report from Halifax from where he gets his figures? House prices in London actually went up by 1.6%! (see the link to the official report at the bottom of this post).
The -2.5% figure was taking into account the rest of the country which had large falls. Bearing in mind that the Standard is a London paper the headline of 'Huge fall in house prices' is misleading and ridiculous.
Link to HBOS report: http://www.hbosplc.com/economy/includes/08_04_08HousePriceIndexMar2008.doc
- Mr Burton, London
Why use such over the top language when reporting these figures - if you study the report more closely you will see that the falls vary enormously from are to area and that London and the south east remain fairly steady and that other factors including high levels of employment mean that a crash is unlikely but the likelihood isn't helped by ridiculously over the top headlines.
- Peter, London
