Prices have fallen 13% over the past 12 months meaning that the average house is now at its most affordable level for over four years.
According to numbers just out from the Halifax, the house-price-to-earnings ratio has fallen from its completely absurd peak of 5.84 in July 2007 to a slightly less absurd level of 5.02 this year (so the average house now costs just over five times the average salary). Better news still is the fact that the ratio is going to keep heading down. Not only is the long term average for it 4, but in every downturn in the property market so far it has fallen well below 4 before finally bottoming out.
So what’s going to make house prices keep falling? Well first, there’s the squeeze in the credit markets. The 0.5% rate cut we saw yesterday along with the UK government’s very credible £500 billion bail out package should address that squeeze to a degree – and will at the very least mean that we avoid a total banking system meltdown.
But that doesn’t mean that the mortgage market is going to free up any time soon. The banks have an entirely different attitude to risk to the one they had 18 months ago – there is no way they will be going back to the lax lending practices of the bubble days. Nor, for that matter, are they likely to be competing with each other to get business: these days running a mortgage bank isn’t about getting in as many new customers as you can, it’s about making money out of the ones you have. Expect mortgages to be both scarce and expensive for the forseeable future. Note that completed property sales were 47% lower in August this year than in August 2007.
Second, there is the recession. The UK economy did not grow at all in the second quarter of this year and is expected to have contracted by a good 0.3% in the third. That means that unemployment should continue to rise; something that will automatically cut the number of new purchases in the market as well as increasing the supply of houses for sale (think forced sales and repossessions).
Finally, there is the role of sentiment. Two years ago no one (the staff of MoneyWeek excepted) really thought house prices might fall. So everyone wanted to buy. Now people are beginning to think that they might keep falling for some time to come. So why would they buy? “Widespread expectations that house prices will continue to fall markedly seem set to depress housing market activity and prices for some considerable time to come”, says Howard Archer of Global Insight.
The average house price in September 2007 was £198,533, according to the Halifax. It’s currently £172,108. That’s quite a fall. But the evidence suggests that the real carnage in the market is still to come.