Nationwide doubts housing crash is over, despite fifth month of rising prices

Published 03rd Oct 2009

UK's largest building society warns of 'considerable headwinds' in the property market, although prices are back to 2008 levels


House prices have bounced back to last year's level, after rising for five successive months, Nationwide reported today, raising hopes that the property crash is over.

The cost of the average property rose by 0.9% last month, to £161,816 – the same price as in September 2008 – according to the UK's biggest building society; but Nationwide cautioned that the market still faced "considerable headwinds".

Economists have been surprised at how rapidly house prices have begun to rise again, after dropping by 13% since late 2007. Compared to the long-drawn-out downturn of the early 1990s, the adjustment over the past year has felt like a short, sharp shock.

But Nationwide is far from alone in harbouring doubts that the housing crash is now over. With banks still restricting the supply of mortgages as they battle to repair their balance sheets, and consumers anxious about rising unemployment, estate agents say few properties are coming on to the market, which is skewing prices.

"What we're finding is yes, prices are higher, but it is still on the back of this availability shortage: I don't think I've ever seen fewer properties coming on to the market," said Jeremy Leaf, director of an estate agency in north London.

He is nervous about the outlook for next year and beyond. "The key to it is managing the interest rate increases, which are going to be inevitable."

Malcolm Parker, of Joplings estate agents in Thirsk, North Yorkshire, said he is seeing cash offers for more expensive homes from buyers who sold properties a year or two ago and have been renting; but first-time homeowners are still struggling to raise a mortgage.

"We're short of property, just straightforward three-bedroom semis, bread-and-butter homes," he said. "There seems to be a shortage of those out there."

"There are properties on the market that are very good value, and a lot of youngsters who would like to buy them, but they can't rake together a deposit."

Ed Stansfield, of the consultancy Capital Economics, said, "I'm very sceptical that the rises in house prices we have seen are likely to be sustained: I think there's a lot further to go for house prices in all European markets."

He reckons that looking at the long-term relationship between house prices and average incomes shows that homes still look expensive, despite the unusually rapid correction in house prices since last year.

The link between house prices and salaries stretched way out of alignment in the boom, as buyers borrowed five or six times their income, and over-extended themselves to buy their stake in the property bonanza; but Stansfield argues that it tends to reassert itself eventually.

In the US, where prices have been falling since 2006 and are now down by an extraordinary 30%, houses already look relatively cheap on this basis; however, on this side of the Atlantic, Stansfield reckons property still looks more than 20% too dear.

Simon Rubinsohn, chief economist at the Royal Institution for Chartered Surveyors, said the upturn over recent months has come in "a strange sort of market".

"It doesn't seem the typical market in housing, because it is constrained in different ways: it's constrained by finance; it's constrained by supply," he said. "It's reasonable to assume that lack of supply is still underpinning prices."

Rubinsohn believes there could be more weakness in store in the new year. "The likelihood is that we will see prices rise into the year-end," he said. "But with the combination of more properties coming on to the market at some point, allied to the continued pick-up in unemployment, the possible shake-out of jobs in the public sector and the possible rise in mortgage rates, there has to be some significant challenges for the market over the next 12 months."

Despite the spate of upbeat readings on the Nationwide and Halifax indices in recent months, other indicators have been pointing to a softening of the market. Mortgage approvals, which had been rising sharply, were flat in August, at 52,000. That was twice the number of a year ago, but still well below the 80,000 that is normally consistent with steady prices. On the Land Registry measure, which covers the entire market, prices fell in August, to a level 9.4% lower than a year ago.

In a fresh sign of consumers' new-found caution yesterday, official figures showed that mortgage borrowers paid down £7bn of their loans between April and June – a sharp turnaround from the frenzied rates of mortgage equity withdrawal at the peak of the boom, when they could extend their loans amid rising prices.

Since the crisis began, homeowners have now paid down a total of £28.9bn. "It is clear that many people are keen to improve their personal balance sheets given higher debt levels and the worrying economic situation," said Howard Archer, of Global Insight.

Source: ' Guardian '

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