“In an age where an Englishman’s home is not only his castle but his retirement fund, the prospect of falling
house prices provokes widespread alarm.
Yesterday Savills, the property advisory group most closely associated with the London
housing market, fuelled the national unease when Jeremy Helsby, its chief executive, reiterated the company’s forecast that house prices could fall by as much as 25% over the next two years.
Mr Helsby argues his prediction should cause no surprise given the widespread transformation of houses from homes to investments.
“Joe Bloggs has spent the last 10 years believing that housing is an investment,” he says, noting that such sentiment led people to buy more property than they needed or could afford.
That forecast, while alarming to homeowners, is hardily out of line with projections made by City economists in recent months. Davis Miles, chief UK economist at Morgan Stanley, has predicted a drop in nominal prices of as much as 20% between 2008 and the end of 2009.
Economists at Citi warn prices are likely to fall by that amount by the end of 2010, but that the forecast may be3 optimistic given the sharp drop in the number of mortgages approved for house purchases. Ed Stansfield, property economist, says the consultancy’s forecast is a drop of 35% in house prices by the end of 2010 – a gloomier prognosis for owners than most.
Nationwide, the UK’s largest building society and compiler of one of the most closely watched indices of house prices, has chosen to scrap its forecast for softening price growth, made last autumn, and not to make another. Fionnualal Earley, chief economist, says this is a function of unusual volatility: “Because things are changing so fast, we decided not to issue a forecast.”
The government’s own assessment, which slipped out in May when briefing notes prepared for Caroline Flint, the housing minister, were caught on camera, expects a fall of 5% - 10%in house prices over three years as a “best-case” scenario.
These forecasts do not appear unduly gloomy when juxtaposed with the trajectory of prices since last October. According to Nationwide, they are down 7.3% from that peak. Some economists believe it is reasonable to assume similar drops in each of the next three six-month periods.
However, not all experts are so gloomy. The Council of Mortgage Lenders, a trade body of the nation’s lenders, says that while it believes conditions will be tough it does not expect any return to the deep housing recession of the early 1990s.
Richard Donnell, head of research at Hometrack, the housing data analysis company, says his forecast is for a 4% decline in house prices in 2008 and a further 2% in 2009. But underlying all forecasts, economists say, is one undeniable fact – prices are still beyond too many first-time buyers.
“The credit crunch and lack of availability of finances are a factor [in lower prices],” says Ms Earley. “But we cannot get away from the fact that demand was softening before the credit crunch because affordability was falling.”
Nationwide’s calculations show the proportion of take-home pay that the average first-time buyer needs to finance a 90% mortgage is rising “close to 1980’s levels”, says Ms Earley. That ratio peaked in the second quarter of 1989 at 55.8% of take-home pay.
Steve Nickell, warden of Nuffield College, Oxford and head of a governmental advisory unit on housing affordability, says that by almost any measure prices are out of line with what people can afford.
By his calculation, with the average house priced at £174,000, financing 80% of that purchase at 6% would take up 45% of pre-tax earnings - much more after taxes are paid - of someone on average income.
Even switching to a less expensive interest only mortgage will not help very much. Prices would have to fall to £115,000 before the average first-time buyer could enter the market.
In London, where prices are far above the national average, Mr Helsby says the biggest impediment to purchases is lack of confidence. “People have to feel that life will get better before they buy a house,” he says. And that is unlikely to happen until they cease to expect house prices to go on falling.