Land Registry: UK house Price Decline Slows, Prolonging the Agony?

The Land Registry Index is out and I hate to say it: I was horribly wrong. It does in fact seem that the rate of house price decline is slowing in England and Wales. According to the Land Registry house prices fell 0.4% in March, when the annual rate of decline slowed from 16.5% to 16.2%. So, the Land Registry says the decline slowed in March, and Nationwide said today (April 30 2009) it has slowed in April.

However, I still say that this is not necessarily a good thing, because it may just be prolonging the decline and the agony.

The rate of house price decline slowing does not signal that the market is bottoming. Only a massive increase in transaction numbers will signal that for me, and we still haven't had that (sales volumes 41-67% lower than a year ago on properties above £50k). Nor are we likely to with the economy still in terrible shape; struggling to gain control over spiralling unemployment, and with mortgage lending still so abysmally tight and unbalanced in favour of those with the largest deposits.

Also, I recently wrote an article, on how the Nationwide historical indices of house prices and affordability showed that corrections like this one become inevitable when house prices extend beyond what is affordable to average first time buyers. In the last crash, prices fell until average mortgage repayments were around 56% of average first time buyers salaries. I believe that the bottom will not be reached in this correction until house prices fall to a similar level. I do not believe we are anywhere close.

The last entry in the Nationwide affordability index shows that in Q4 2008, average mortgage repayments were 105% of average first time buyers salaries, in short: first time buyers were priced out of the market.

I spoke to Fionnula Earley, Nationwide's chief economist, to see if I could get up to date information on current affordability. Unfortunately I could not, because they are still compiling the data on how the interest rate changes have affected affordability.

This left me to estimate: in Q4 2008 the Nationwide house price index put the average house price at £156,828, at which point, as I said average monthly mortgage repayments were 105% of the average salary of first time buyers. Although the most recent index shows the average house price actually increased from £150,946 in March to £151,861, the index since 1952 puts the average for Q1 2009 at £149,709, and we are comparing to a quarterly affordability index so we'll go with that.

This is a decrease of approximately 5%. Between Q3 and Q4 2008 the affordability index showed a 12.7% drop, that is to say average mortgage repayments were 12.7% lower when compared to the average salary of a first time buyer. During that time the average house price fell the same as it did between Q4 2008 and Q1 2009; around 5%. So, though it is not exact, it is fairly safe to say that the affordability index will have fallen about another 12.7%, meaning average mortgage repayments will be about 92.3% of the average first time buyer's salary.

Even though prices have fallen considerably many first time buyers are still completely priced out of the market. In some cases this is mainly because of banks demanding large deposits, but in some cases first time buyers still cannot afford mortgage repayments based on house prices in their area.

The HomeBuy Direct scheme can go some way to helping this, but again it is dependent on a recovery to the wider economy. No one is going to take on a mortgage, shared-equity or no, when they are unemployed or in fear of losing their jobs. And even in a wider recovery, the HomeBuy direct scheme can not help every first time buyer that is priced out of the market; the fund is only so big, only some lenders have signed on, and it can only be used on participating developments, which means only certain areas.

In my opinion, the only thing that can truly increase affordability on a grand enough scale to reverse the correction is further price drops. If we look at the affordability index, price drops stopped in the last correction when average mortgage repayments were only 56% of average first time buyer salaries.

This means we need around 36% shaving off the current affordability figure (avg. Mortgage repayments compared to avg. ftb salary). If a 5% drop on the average house price, brings around 12% off the affordability index, then we need about another 15% to come off the average UK house price.