“Jeepers,” as Julia Finch put it in The Guardian. The housing market is in “freefall”. Last week Nationwide said house prices fell by 2.5% in May alone, the biggest monthly decline on record.
Demand is still weakening: mortgage approvals for new house purchase slumped to 58,000 in April, according to Bank of England figures – 50% down on a year ago and a record low below the trough of the 1990s slump.
What’s more, credit conditions continue to tighten. Nationwide has just announced it will raise rates on fixed-rate mortgages by 0.3% owing to higher money-market rates, and falling prices are “becoming an additional deterrent to potential buyers”, said Capital Economics. New buyer enquiries are already at their lowest level since 1999. Our forecast of a 20% drop by the end of 2009 “may be slightly conservative”.
Buy-to-let sector buckles
A key element of the slide is set to be sales by buy-to-let investors. As George Hay noted on Breakingviews, The Bank of England warned last month that rental income was too low to cover the mortgage obligations of the more highly-geared investors. Bradford & Bingley (B&B), 60% of whose mortgage book comprises buy-to-let accounts, “has just found that out the hard way”. Due to a squeeze on margins amid rising credit costs and a sharp jump in bad debts, it lost £8m in the first four months.
The number of B&B’s landlords at least three months in arrears has jumped by 50% and repossessions are up by 25%. Following a dramatic deterioration in trading, and a slump in the share price, it is repricing a rights issue launched just three weeks ago.
The tougher economic environment will continue to boost arrears, warns B&B. No wonder other bank shares came under the cosh this week. With landlords’ confidence evaporating now that the housing downturn is entrenched and credit conditions hardly likely to loosen soon (keeping refinancing costs high when many landlords are coming off two-year fixed deals), there are fears that a panic sell-off by landlords “could turn the property downturn into a full-scale rout”, said The Guardian’s Patrick Collinson.
Wider economy on the slide
With sliding house prices making consumers fell considerably poorer, consumer gloom will soon engulf the high street. Two-thirds of the sharp slump in consumer confidence over the past year is due to house price falls, reckons Capital Economics. Meanwhile, the overall services sector and the manufacturing sector are already officially on the brink of contracting and unemployment is rising. As Liberal Democrat Vince Cable put it, a “massive hangover” from the housing and credit bubble is kicking in.