The great house-price debate is getting exciting again. After Nationwide reported that prices fell by 0.5% in July, Halifax came out and put a spring back in the bulls’ step by saying that prices had in fact risen by 0.6%. But annual growth slid from 6.3% to 4.9%. And prices are essentially flat on the year.
The standard response of the bulls is that there’s nothing to fear. Prices were bound to ‘stabilise’ after the rally we’ve seen. Besides, we’re now in a two-tier market. As David Smith of Carter Jonas put it: “Increased supply is certainly putting downward pressure on prices at the lower end of the market, but at the mid-to-high end, prices remain buoyant… At the lower end of the market, concerns over the economy and difficulties securing mortgage finance are far more material.”
In other words, houses at the cheap end will get cheaper, but not to worry, people with real money can always be relied on to spend it on property. It’s a nice line, convincing even – but it doesn’t match up to the reality. According to Knight Frank, the price of ‘prime’ London property is on the turn too. Their Prime Central London Index showed property prices falling by 0.5% in July – the first such fall since March 2009.
So what killed off the rally? Rising supply has helped. The end of Home Information Packs (Hips) has seen the number of people putting their homes up for sale surge now that they don’t have to pay £300-odd to test the market. And many sellers probably believe their homes have just about returned to peak value after the year-long rally, which may have encouraged them to try their luck.
But the number of buyers is dropping too. Mortgage approvals are slipping back. In December they stood at over 57,000. Yet they haven’t been above 50,000 in any single month this year. And between May and June the number of approvals slid from 49,500 to 47,600. To put that in perspective, in the boom days, figures of 100,000 or more a month were typical.
Have buyers given up? Maybe. Or perhaps banks are getting wary again. Take Lloyds, for example. As the BBC’s Robert Peston points out, just over 60% of Lloyds’ loans to customers are financed by deposits. The rest of the money comes from the wholesale markets. But these virtually shut down during the credit crunch.
So in fact, a big chunk of that money – £132bn – is in the form of loans from the government and the Bank of England. Most of that needs to be repaid by 2012. Lloyds says it’s able to do this but, of course, if it has to repay this money, it’s not going to be lending it to the likes of you or me. Lloyds is far from the only bank in this position. The idea of a smooth landing followed by a gentle real-terms decline for house prices is a comforting notion, but I’m far from convinced it’s what we’ll get.