With Unemployment still sharply increasing, it may be overly optimistic to consider a housing recovery. But, with house prices already fallen 25% some forecasters are predicting the worst is over and house prices could stage a modest recovery by the end of the year.
On the plus side
- Signs of renewed activity in the mortgage industry – admittedly from a lower basis
- Affordability of mortgages has increased with 0.5% interest rates.
- Optimism returning to the market with more analysts and buyers expecting a modest rise in prices within the next 12 months.
- Fall in house price to earnings ratio. Halifax house price to earnings ratio has fallen from 5.85 to 4.26. This is a level last seen in 2002. However, it is worth bearing in mind, in the mid 1990s this ratio fell to 2.5. And 4.26 is still above the long term average.
- The slowdown in house price falls, allows mortgage lenders to offer better deals to homeowners. When house prices stop falling, banks will require less of a deposit to insulate against negative equity.
- The UK does not have an excess of supply in housing like for example Spain, Ireland and US
On the Negative Side
- Affordability has increased but mortgage lenders are still requiring large deposits which makes buying a house difficult.
- Unemployment is forecast to rise to 3 million, this will lead to more home repossessions and reduce house prices.
- House price to earnings ratio still above long run trends
- Prospect of rising interest rates in 2010, though many banks have kept their rates significantly higher than the bank of England base rate
- In the last housing bust, house prices fell for 4 years (with monthly exceptions of rising prices) before recovering (historical house prices)
Lloyds which comprises 30% of the UK mortgage market, expects UK house prices to fall another 8% this year, before staging a modest recovery at the end of 2009
Overall,
If the UK had built a large surplus of housing in the boom, I think house prices would have to fall for much longer and much further. However, given relative shortage of housing to long term demand, we may expect a house price to income ratio of 4 to be more likely. As house prices stop falling, it will also create a lot of positive momentum in the housing market. No body wants to buy when prices are falling, but, when this cycle is broken it may tempt many back into the market.
Given perilous state of economy, house prices will continue to fall further this year, but, the end of drastic house prices falls is in sight, which will come as a relief to many. Furthermore, at the moment, the recovery is likely to be weak, I cannot see a quick return to the heady days of the early 2000s. But, that is the last thing the UK housing market needs
Well there were reports in the news that property sales were up in April. I guess we will have to wait and see. I personally feel that the market hasn’t quite bottomed out yet.