Housing market 'to tumble until 2010'

Wednesday 12th November 2008

By Rachel Jones
Know Your Money Editor

Nationwide has warned that house prices will continue to fall until 2010, with the average value of a home £30,000 less than this time last year. With such a dramatic drop, the building society's chief executive Graham Beale claims that combined with an interest rate cut, it could mean good news for first-time buyers. Indeed, with the Bank dropping the rate down to three per cent, mortgages appear to be more affordable for those looking to get on the property ladder. But what does an unstable housing market mean for those who already own a home and are concerned about the downturn in prices? And for those who wish to sell, when is the right time for them to do so?

The property problem

The high-street building society's report states that house prices fell by 1.4 per cent in October 2008 and one of the main reasons for this is the reluctance of individuals to put their homes up for sale. This was the 12th consecutive monthly drop in the housing market, resulting in house prices being 14.6 per cent lower than this time last year, when the market was at its peak. With the average UK property price standing at £158,872, another £30,000 being wiped off could lead to a startling situation.

But why has there been such a drop, not marked by an increase in market activity? Indeed, the Royal Institution of Chartered Surveyors (Rics) claims that there is more stock per agent than was the case in 1998. Nationwide's chief economist Fionnuala Earley says: "One possible explanation for this is that it is only those sellers willing to negotiate on price that are seeing sales go through. While others refuse to cut the price, the levels of activity are constrained."

However, with sellers unwilling to budge on their asking prices and consumers refusing to buy a property unless it comes with a hefty discount, Ms Earley adds: "This type of stalemate ultimately limits the number of transactions which can take place."

Nationwide's crystal ball

With the news that house prices have dropped during 2008, what lies ahead for the future of the market? The credit crunch and financial uncertainty means that it could take a while for the value of homes to bounce back, although the interest rate cut of one-and-a-half percentage points might take the pressure off people coming to the end of fixed-rate deals and those borrowers who have secured variable-rate loans. Despite Nationwide's predictions of a looming recession further pushing prices down for the next two years, Rics is more positive about the outcome. A fifth of chartered surveyors questioned believe that while sales have hit a new low, they should pick up over the next three months. Vendors are expected to drop their selling prices, although it could be said that those families who need to move because of education or work commitments will put their property on the market no matter what.

Ian Perry, a Rics spokesperson, says: "Last week's interest rate cut should certainly help to support the market now that lenders have agreed to pass on the reduction to borrowers. Even so, the general lack of mortgage finance remains a major blockage in the housing market for a large majority of would-be buyers." Nationwide slashed mortgage lending, as did Alliance & Leicester, which has announced that it has launched a two-year fixed-rate product with a 4.49 per cent interest rate, fixed until December 31st 2010, then a standard variable rate thereafter. Meanwhile, its two-year base-rate tracker stands at 4.89 per cent.

Commenting on the news, Mr Perry adds: "Fortunately, many vendors have finally started to accept current market conditions and are dropping their asking prices to achieve a sale. Sales should increase in the coming months as more and more sellers understand that greater realism is the only way to make that long desired move."

So what happens next?

Nationwide predicts that the Bank will further cut interest rates by 50 basis points in the last two months of this year; however, coordinated action by other central banks may warrant a larger cut. Meanwhile, with the building society reporting that households may hold back on remortgaging because of the decrease in equity, Lloyds TSB and Abbey have joined Alliance & Leicester in launching new rates. Now could be a good time to shop around for the best deal to discover the most effective way to get through the stormy housing market, advice which people with a mortgage deal ending soon may want to consider. ADNFCR-8000200-ID-18871556-ADNFCR ©