Fall in [UK] house prices accelerates

Financial Times
By Chris Giles, Economics Editor
Published: July 31 2008 07:51

House prices took another lurch lower in July, with the ninth consecutive monthly fall in house prices, leading to the largest year-on- year drop in property values since the early 1990s, the Nationwide Building Society reported on Thursday.
House prices in July were 8.1 per cent lower than a year ago, the lowest annual rate of inflation since the lender started producing monthly figures in 1991.

With demand for housing low, increasingly stringent conditions being applied to mortgage applicants and lenders finding wholesale funding scarce and expensive, a bottom to the housing decline remains far out of sight.

... the fall in house prices is accelerating, according to the Nationwide’s figures. The annual drop in house prices was steeper at 8.1 per cent in July than 6.3 per cent in June. On a three month annualised basis, prices were falling at a rate of 19 per cent compared with 15.6 per cent in June.

... “There are around 41 per cent fewer first time buyers now than at the same time last year. This may be due to their own desire to delay purchase because they expect prices to continue to fall, or frustration in obtaining finance, but the impact on the market is likely to be the same. That is that chains become longer and have a greater propensity to break down”
She added that the average house price had fallen £15,000 in the past year and was now only £11,000 higher than three years ago. The average UK house price was £169,316 in July compared with £172,415 in June and £186,044 last October, the Nationwide said.

According to a report by Standard & Poors, house prices are going to fall another 17% from current levels, increasing the number of households with negative equity on their homes from just 70,000 today to 1.7 million, or 14% of mortgage holders (Chris Giles, FT Economics Editor; Financial Times, July 31 2008). Graphics courtesy of The Financial Times.


According to the FT, these trends contain both good and bad news for policy makers. Good news in that the market apears to be resilient in terms of the number of households predicted to be in negative equity at the bottom of the market (1.7 million) is less than the number at the bottom of the house prices crash in the early 1990s, when 1.8 million households owed more mortgage than their homes were worth.
The bad news is that in cash terms, house prices apppear to be falling faster than in the early 1990s crisis, which suggests that a similar proportion could end up in negative equity.

The S&P data is authoritative because it looks at a large sample of about 2 million mortgages in securitisation vehicles thhat they were asked to provide credit ratins on. Most other recent estimates are based on data for mortgages at the time of origination (whichi is all the data the institutions issuing the mortgages would have, as they typically then package the mortgages into securitisation vehicles and sell them on), rather than on a sample of outstanding loans.

The data shows that most homeowners are extremely safe as the average loan to book ratio of most households' mortgages is only 54%. This is great news. Buy-to-let mortgages are at a greater risk due to higher leverage. With loan to book ratios of around 80%, S&P's Andy South expects that a 20% drop (from peak) of house prices will suddenly plunge many BtL mortgages into negative equity. I expect that most investors will be aware of this risk, and should have taken steps to ensure that they can weather this degree of negative period for a while.

Some analysts forecast a bigger overall drop in house prices from their peak in October 2008. According to the FT, "Capital Economics, a consultancy with a record of pessimistic predictions, on Wednesday forecast that house prices would drop 35 per cent from peak to trough. Their prediction came as consumer confidence on the GfK researchers measure dropped to an all-time low".

Meanwhile, a task force led by HBOS CEO Sir James Crosby, commissioned by the Treasury to "lead a review into improving wholesale mortgage financing (FT)", is expected to recommend that the UK government and the Bank of England should not try and intervene to provide funding to support mortgage lenders, but should leave long-term funding of mortgages in to the market. The Crosby report will not be received very well by mortgage lenders, who have been lobbying intensely for govenment support.