It Does Not Look Good for UK House Prices

Well apparently the tide of opinion has changed on UK house prices, or rather the direction in which they are likely to go in the near future. Most analysts now believe prices will fall this year, and many believe they will fall next year as well.

It does seem like things are now conspiring against the market: supply is rising rapidly and set to continue doing so and the pound is strengthening bringing the exodus of foreign buyers. On top of that homes are still unaffordable to the masses, and we don't know -- for sure -- when the government will raise rates. Indeed it doesn't look good for the housing market.

The Telegraph quoted a few of the bullish analysts -- some of whom, if I'm not mistaken recently appeared in articles predicting further rises, or certainly the bodies they represent --:

Ed Stansfield of Capital Economics said: "Low interest rates should be supportive for house prices. But public sector job losses, tax rises and spending cuts will squeeze household incomes further, as well as denting confidence.

"What's more, the uncertain outlook for mortgage funding means that the availability of mortgage credit is unlikely to improve and could even be tightened again later this year. Given that the market remains overvalued, I suspect that house prices will end 2010 down by 5pc and will drop a further 10pc in 2011."

Hetal Mehta, the senior economic adviser to the Ernst & Young Item Club, said: "It is not looking good for the housing market ... we may be at a turning point." Howard Archer of IHS Global Insight said he would "not be surprised" if house prices were flat overall for the rest of this year and Peter Bolton King, the head of the National Association of Estate Agents, predicted a similar outcome.

As many of you will know, I have always believed a second correction became inevitable when the last one ended; a correction is meant to correct overvaluation, but a combination of weak supply, the stimulus -- low interest rates and buyer incentives -- and foreign buyers brought in by the weak pound prevented this one from doing its job -- houses in the UK were still overvalued when prices started to rise last March.

Now it is judgement day: supply is rising because of the abolition of HIPs, and likely to increase further as the government goes from no-stimulation to cut-backs threatening millions of public sector jobs, on top of that the pound is strengthening taking foreigners out of the equation and finally Nationwide has recently released its house price to earning index showing the average house price to be 4.6 times the average first time buyers salary, well above the long-time average of 3.3 times.

When prices started to rise last March, it was like circumstances had conspired together to bring respite to the market. Well now the opposite is true, almost everything is now pointing to prices falling. Even mortgage approvals are falling again:

Mortgage approvals turned positive long after prices had started rising, at which point both weak supply -- the other factors -- and rising demand were supporting the growth. Of course, even when mortgage approvals were at their peak they were still below the long-time average, and supply was still the main driver of growth. So now, it is supply rising which is the biggest concern.

According to the Rightmove index of asking prices supply increase 22%, from 27,235 houses coming onto the market each week in May to 33,149 houses coming onto the market in June. According to the British Bankers Association 36,709 mortgages were approved for house purchase in May, which is approximately 8470 each week, well short of the number of homes coming onto the market **. So, with supply likely to continue rising as the government cuts jobs, and demand unlikely to rise and maybe even fall depending on when the government raises interest rates (that's another story altogether) it certainly does not look good for the housing market.

**The BBA stats are only on the high street banks, but this is where most mortgages come from, and the BBA stats have always been closely matched to other bodies including the Council of Mortgage Lenders.

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