House prices face first annual fall since mid-90s

Published 29th Mar 2008

House prices will fall in 2008 on an annual basis for the first time since the mid-1990s as a global credit crunch and fears of rising unemployment and possible recession take their toll, a Reuters poll shows.

There is a 78 percent chance house prices will fall on an annual basis at some point this year, according to the quarterly Reuters poll of 30 analysts at banks, investment firms and research institutes taken March 25-27.

This compares to 65 percent forecast in a January poll and just a 30 percent chance predicted in October. Prices will fall by 0.8 percent in 2008 as a whole and 2.0 percent in 2009, medians in the poll showed, ending years of rocketing prices that were fuelled by cheap and easily available credit that is now increasingly harder to get.

Forecasts for 2008 ranged from a 10 percent fall to a 3 percent rise, highlighting market uncertainty, although that compares with an 8 percent fall and a 5 percent rise in the last poll and shows the outlook is deteriorating.

"Tightening credit conditions, weak purchasing power and a softening labour market will all prevent a resurgence in house price inflation," said Matthew Sharratt, an economist at Bank of America in London.

The housing market, a bedrock of consumer wealth that has tripled in value over the last decade, has been slowing rapidly in the face of a global credit crunch.

HBOS, Britain's biggest mortgage lender, and Alliance & Leicester are asking for larger deposits and raising the criteria to obtain credit.

Many lenders are tightening credit conditions for new borrowers even as base rates have dropped and millions of homeowners are set to get hit with higher mortgage rates when cheaper fixed-rate deals from two years ago expire this year.

"A key difference with 2004/05 when monetary easing did stoke up house prices is the reluctance of lenders to lend," said Simon Rubinsohn, the chief economists at the Royal Institution of Chartered Surveyors (RICS).

The Nationwide Building Society said on Friday that house prices fell 0.6 percent in March after a 0.5 percent fall the month before, for their fifth successive monthly decline. The annual rate of increase fell to 1.1 percent, the lowest since 1996.

Most economists said that UK house prices are over-inflated, with some estimates as high as 40 percent, but only by a median 15 percent.

The U.S. housing market is suffering its worst price falls on record and many homeowners are now stuck with mortgages worth more than the property they own and thousands unable to keep up with payments and faced with repossessions.


UK RATES TO FALL GRADUALLY

The Bank of England cut rates by 25 basis points to 5.25 percent in February after making the first cut in over two years in December and analysts agree that it is only a matter of time before they fall again, possibly as soon as next month.

A snap poll by Reuters last week found that the BoE is almost certain to cut interest rates by May, and continue cutting to 4.5 percent by the end of the year, as the bank tries to head off economic and financial turmoil.

But rates are not falling anywhere near as fast as they have in the United States, where they have tumbled by 3 percentage points since last September and are set to fall further still.

BoE mortgage approvals -- which are a reliable leading indicator of future housing activity -- fell at the end of last year to their lowest since records began in 1999, and have shown little recovery since.

Approvals picked up in January to 74,000 from 72,000 in December but economists forecast them at just 70,000 in six months before rising to 80,000 in 12 months. That compares with 75,000 and 85,000 in the poll three months ago.

"The recent weakness in demand, evidenced by low levels of new buyer inquiries, will be exacerbated over coming months as the economy slows, unemployment begins to rise and job security is undermined," Ed Stansfield, an economist at Capital Economics said.

The slowdown is showing in housebuilders as well.
Taylor Wimpey, Britain's biggest housebuilder by volume, said earlier this month order book sales had fallen 19 percent on a year ago as the UK market was "subdued". But the second biggest, Barratt, said conditions had improved and it remained cautiously optimistic.

By Jonathan Cable

Source: ' Reuters '

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