“Contagion is in the air. The US sneezed and Britain is catching a cold,” comments the Guardian’s Larry Elliot in response to the latest housing bombshell from the Nationwide.
The building society’s latest figures make grim reading – UK house prices fell by 1.1% in April, the sixth month to see a drop. House prices are now 4% lower than in October. But the figure that’s likely to grab the headlines is the fact that house prices are now falling year-on-year for the first time since March 1996. The average house price is now 1% lower than 12 months ago, at £178,555. Worse, the pace of falls is gathering momentum – Nationwide reported a fall of only 0.7% for March.
The Nationwide figures are just one part of a growing avalanche of negative housing data. Last month, the Halifax reported a price fall in March of 2.5% on agreed sales, whilst the Land Registry, which focuses on the final completion price, reported a 0.4% drop.
And the slump shows every sign of continuing. The latest mortgage approval figures, which give a good idea of what prices will be doing in six months’ time, were dire. Just 64,000 loans for new house purchases were agreed last month, the lowest figure since 1993, according to the Bank of England – a time when the UK was clambering out of the last major recession.
The reason behind the collapse in approvals is very simple. Banks have called a halt to the days of free and easy lending. Despite a string of base interest rate cuts, the average mortgage rate has gone up by 1.25% in the past five months. The days of the 100% mortgage are over, and most lenders now require a 10% deposit, or 25% if you want a decent interest rate.
So where will all this end? The truth is no-one knows for sure just how bad the UK’s housing slump will be since the housing boom that preceded it was unprecedented – UK house prices tripled in a decade, outpacing even the frothy US market, which doubled before prices started heading south over 18 months ago.
However, some pretty heavy-weight commentators are now weighing in with opinions. Yesterday for example, Bank of England Monetary Policy Committee member David Blanchflower stated “in my view a (peak to trough) correction of approximately one third in house prices does not seem implausible”.
Meanwhile Morgan Stanley is pencilling in a 15% drop over the next two years alone, enough to plunge 1.2m households into negative equity. James Ferguson, stockbroker and economist at Pali International, reckons prices could fall by as much as 40% – see here for more details: Are we heading for a house price crash?
So what’s to be done? That all depends on who you ask but one thing’s for sure, the scene is being set for an almighty showdown between the Governor of the Bank of England, Mervyn King and Prime Minister Gordon Brown. Mervyn King has already stated several times that he doesn’t want to see the mortgage market return to where it was a year ago. “There needs to be some adjustment” he said last week.
But that’s not an option for Gordon Brown – negative equity is bad news for votes, after all. “We’ve got the house price figures that were announced today that we’ve got to deal with,” he said this morning. Specifically he wants to take “the right decisions to get liquidity to the banks, to make sure that the housing market starts moving again”.
But like what Gordon? Many are laying the blame for the collapse at the foot of the banks, accusing them of withdrawing funds and forcing British homeowners to pay for careless investments in the US. But the truth is that there’s been plenty of careless lending over here too. Six-times salary loans and 125% mortgages are not the stuff of normal credit markets.
And no amount of rhetoric or grandiose “special liquidity schemes” will persuade banks to start lending against the value of falling assets without demanding big deposits or charging higher interest rates, or both. The soft landing that so many bulls have been praying for isn’t going to happen. All that remains to be seen is just how painful the crash landing will get.