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House Prices Set To Fall Again by John de Roe.
Despite government eforts to talk up a recovery the economy remains stubbornly stagnant. It is unsurprising really, the UK economy still relies far too much on the housing and property market and with incomes being squeezed and house prices remaining so high they are beyond the reach of first time buyers there is little change of increased activity while unemployment continues to rise.

House Prices Set To Fall Again
by John de Roe.
2010-08-30
CREATIVE COMMONS: Attribute, non commercial, no derivs.
KEYWORDS: house, housing, property, mortgage, investment, land, value, market, recession, home, sales, debt, domestic, interest, consumer, government, social, bank

Property has always been considered the safest investment in Britain. In a small island with a big population building land is always going to be at a premium and so, right from the day I began work as a junior teller in a local bank we in the finance industry were taught to advise people, to get your money into property." This is no longer true. It may became true again in the future but for now the property market is stagnant and can only fall.

Mortgage applications are running at well below their pre - recession levels and according to industry figures published today only 20% of the mortgages being granted are to first time buyers.

Summer is a traditionally quiet period for home sales but what is happening is in my opinion more that just a seasonal blip. The housing market is struggling and before sales can get moving again property prices must fall considerably. First time buyers simply cannot afford to get on the housing ladder.

We have heard that a surge of growth in the economy in the second quarter of 2010 as seen the economy growing at its fastest rate in nine years. So it would seem logical, as our economy is usually housing - led, that house prices would be on the up. We expect there to be a relationship between a growing economy and a strong property market.

It is not hard to understand why this trends has broken down: in recent years, in order to fuel a debt led, consumer spending driven boom the housing market has been weighted in favour of existing mortgage payers. This has worked against first time buyers trying to get on the housing ladder. The Bank rate was cut from 5% to 0.5% and The Bank of England launched its quantitative easing programme, which has added 200bn to the money supply. Ministers put pressure on lenders to go easy on those in mortgage arrears to stave off an explosion in the number of repossessions which would have has serious repercussions for the government of the day.

In the recession of the 1990s, Britain saw record repossessions when first a stock market bubble and then a housing bubble burst.

In terms of saving people's homes the reduction of interest rates to an all time low provided a boost to real incomes for those with variable-rate home loans. This meant they could spend more freely or pay off domestic debts more quickly or at least get out of the monthly deficit situation they had brought on themselves by remortgaging their home to finance consumer spending.

Nothing is without a downside however; the low interest policy created an insider-outside problem. When the property bubble popped in the late 1980s, house prices fell for six years, making them affordable again for first-time buyers. This time, the scale of the policy response meant prices steadied much more quickly; they were edging up in the spring of 2009, even though economic output was still falling and incomes were falling while joblessness was rising. Thus people who did not have an existing mortgage or a house to sell were squeezed from both sides.

There was more bad news to come for beleaguered first time buyers however. In the boom years, the easy availability of 100% home loans equivalent to up to five times the applicant's annual earnings meant many people could pay the inflated prices being asked. After Northern Rock had collapsed and other financial institutions started to fall like dominoes in its wake, banks and building societies started to ask for deposits of 20% or more. The average price of a home is well over 150,000, putting decent properties beyond the majority of first-time buyers.

From there things can go three ways. The incomes of potential market entrants can rise so that they can afford high prices. House prices can fall to make them compatible with what first-time buyers can currently manage. Or and this best sums up the present position the property market grinds to a halt.

At the moment with little good news on either the jobs or incomes front option three is the front runner. Because of stringent new deposit rules , it is no surprise first time buyers are thin on the ground.

The Council of Mortgage Lenders has released data showing the number of first-time buyers is down from 500,000 a year at the turn of the century to 200,000. Whatever steps government and the banks have taken to rectify this problem have been unsuccessful. People feel insecure and insecure people do not commit themselves to a twenty five year investment. Young people are starting to have the attitude that they were not born simply to pay off a mortgage.

How do we solve the problem? The coalition could put aside fifty years commitment to the spread of private home ownership, allow councils to release the funds raised by the first sell off of municipal housing and encourage other providers such as housing associations to build more homes in the parts of the country where people want to live. Existing 'right to buy' legislation would act to prevent the ghettoisation of social housing that happened in the 1970s and 80s Spending cuts necessitated by the need to reduce Labour's deficit make that a difficult policy to adopt in the short term but if a plan is announced now it would have the effect of destigmatizing social housing and make long term renting a more attractive option.

The worst thing however would be to take a laissez faire approach and leave the market to adjust to the realities of a jobless recovery. That would really create a two tier society.

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The Slug and The SnailThis amusing little poem shows an alternative approach if you don't like the idea of getting on the property ladders and constantly worrying whether movements in house prices will make you a mortgage slave.

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