It’s been a strange couple of years. The UK housing market is no stranger to booms and busts, but the recent credit crunch and recent recession has been one of the most testing experiences for the UK property market.
After falling 20% from their 2007 peak, house prices unexpectedly rose in 2009. – According to the Nationwide, house prices were 6% higher at the end of 2009 than the start. Many point to house price to earnings ratio’s and point out they are significantly higher than at the end of the last bust. This will certainly be a factor keeping house prices low; it will prevent any rapid increase in prices and could lead to a further downward correction. But, against this backdrop, there are some encouraging signs of a return to more normal lending conditions.
The first positive sign is the improvement in housing transactions (admittedly from record lows). When housing transactions were very low, it meant changes in house prices were more a reflection of the unusually shortages of property on the market.
Banks gave 60,518 loans to buy homes, up from 57,718 in October, this is highest level since 2008. The amount of net mortgages rose to £1.5bn the most for nearly 11 months. Whilst there will be no return to the boom conditions of the naughties, there are signs banks are slowly expecting to increase the number of mortgages.
Disposable Income Spent on Mortgages
The proportion of disposable income spent on mortgage payments, by first time buyers has fallen from 50% of average earnings in June 2007, to 27 per cent by November 2009. This is below the long term average of 35% and will definitely encourage more into the market.
The stabilisation in house prices may well encourage people to sell who have been holding off. But, on the other hand, the end of dramatic falls may also encourage buyers back into the market.
How Long 0% Interest Rates?
Since we talk of returning to normal, we can’t expect interest rates to remain at 0% forever. Yet, forecasts for growth suggest the Bank of England has no plans to raise interest rates in the foreseeable future. It is likely in 2010 we will see an end to quantitative easing and efforts to reduce fiscal deficit. Both these will keep pressure on the Bank to maintain low interest rates.
Certainly, 0% interest rates have done wonders for avoiding repossessions. The number of repossessions is much lower in this recession than in the last. When the economy returns to normal growth, and interest rates rise to 5%, many who have been hanging on may suddenly start to struggle.
The overall outlook for 2010 looks for a period of consolidation. I think the most likelyhood for house prices is to remain static. They may go down a little, they may even go up. But, it is hard to see wild swings in house prices this year.
This stability is no bad thing. After the roller-coaster ride of the past couple of decades, a period of consolidation could be just what the housing market needs.