So we read again that house prices are falling again. According to the RICS survey of chartered surveyors, the housing market weakened in July for the first time in a year, and some banks now expect prices to be stagnant for the 3rd and 4th quarters this year.
But is this really such bad news? First of all, the recent weakness follows a surprisingly strong recovery in the second half of last year. As the RICS housing market survey noted, last year’s firmer prices were the result, at least in part, of a dearth of supply. When prices improved and the much maligned Home Information Packs were scrapped by the new Government, more sellers put their properties up for sale… and, lo and behold, prices weakened a bit. Such ebbs and flows are typical of the erratic and seasonal UK property market, which is why it doesn’t make sense to worry too much about these short-term movements.
If one looks beyond the monthly gyrations, one has to be impressed with how prices have held following the financial crisis. According to Halifax data, house prices dropped 23 per cent from their peak in August 2007 to the recent trough in April 2009, but following last year’s second-half recovery, are now just 16 per cent below that peak.
Furthermore, this necessary correction in house prices has been achieved without the pain of widespread arrears and defaults suffered in the 1990s. That is because, thanks to low interest rates, most borrowers have been able to continue to service the interest on their mortgages and even to pay down their debt. It is true that compared with the bank rate of 0.5 per cent, mortgage rates don’t look particularly cheap these days. Nevertheless, mortgage rates are low by historical standards, allowing most borrowers to hang on, even in shakier areas of the market such as buy-to-let.
But some economists warn, the weakness in the housing market is a worrying symptom that confidence in the economy is faltering. Well, I agree up to a point. It is true that people are nervous about taking on new or bigger mortgages at a time when the economy remains weak and their jobs may not be secure. But I can’t seem to persuade myself that this is a bad thing. Of course it would be better all round if the economic future looked dazzling, but since it doesn’t, surely it’s a rather good sign that consumers are no longer rushing to borrow money they may not be able to repay. This was, after all, one of the root causes of the current economic malaise.
The Bank of England’s Inflation Report shows that the economic outlook is not startling. This means that even if there are mounting inflationary pressures, they are likely to be short-lived. But if the continuing weakness of the economy stops any concerted property market rally in its tracks, it also makes it much less likely that interest rates will rise sharply any time soon despite worries about inflation; and continuing low interest rates are vital to forestall a sharp downturn in house prices.
There may then be a period of flat house prices. This is surely preferable to a sharp rally. Since the credit crunch, banks have tightened their mortgage-lending criteria, mainly by requiring bigger deposits and cracking down on self-certification mortgages. The Government is imposing tighter rules in these areas to prevent a return to previous patterns of behaviour once recent lessons are forgotten. If, in these circumstances, house prices were to rise significantly, it would become even more difficult for first-time buyers to enter the market. Inevitably, that would mean, in due course, that the new bubble would burst.
In fact, mortgage affordability has already improved as a result of lower prices. Repayments as a percentage of earnings fell to 30 per cent in the second quarter of this year, down from 48 per cent in August 2007, but still some way from 25 per cent at the end of the last decade.
Everyone wants a stable UK property market but if this doesn’t happen, the next best thing is to pretend that it has stabilised! Unless you are in the uncomfortable position of being a first-time buyer or a forced seller, price fluctuations really don’t matter all that much. In the long-term, prices tend to go up, because Britons like to own their own homes and we live in a small island with tight building restrictions. Neither the current Government’s plans to shift planning powers to local communities nor any other policy change is likely to alter this state of affairs fundamentally.
The problem with the British housing market is not that we all aspire to own property. That is perfectly sensible. The problem is that we sometimes forget why we want to own our own homes.