A “desperately poor year” for housing

The property-market bulls seem to think that 2005 has gone their way. Listen to Fionnuala Earley, Nationwide's chief economist. She told The Independent last week that the bears have been "eating humble pie" lately: instead of crashing, she says the housing market has shown "resilience" and "stability" in 2005, with annual house-price growth (through November) coming in at 2.4%.

But does this really count as good news? We aren't so sure. As Jim Pickard points out in the FT, the flood of data into the housing market is both volatile and contradictory. No two indices tell us the same thing something that means that both sides in the great housing debate can "cherry pick" the numbers that suit their case. At MoneyWeek, we would point to the fact that, even if the Nationwide's figures were an accurate reflection of prices in the UK, if you adjust them for inflation, the average house price is up a mere 0.3% on the year so far. Hardly enough to make bears feel humble!

We'd also point to the latest numbers from Hometrack (which surveys 7,500 estate agents to produce one of the most unbiased surveys in the market). According to them, house prices in the UK fell 1.3% in 2005 (that means they are down 3.8% in real terms). In fact, house prices rose in only three of 58 areas in the entire country (central London, West Yorkshire and Derbyshire). In Milton Keynes, they fell 7%, in Lincoln they fell 6% and in Plymouth (one of the big buy-to-let boom areas), they fell 4%.

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Then there's a much more important thing, one that can't be argued with the fact that transactions in the market have fallen to a 30-year low. In a typical year, around 1.2 million homes are sold in England and Wales, according to the Council of Mortgage Lenders. But this year, the group expects the final tally to come it at only 970,000 sales.

As James Ferguson pointed out in MoneyWeek earlier in 2005, this is vitally important. Falling transactions tell us that buyers are refusing to pay the prices that sellers are demanding, something that creates a market stalemate, but which can't last indefinitely: at some point buyers have to agree to pay more, or sellers have to agree to accept less. We find it very hard to imagine it will be the former.

Nationwide tell us "the economy is too robust to trigger large house-price falls". Really? Despite the fact that unemployment has just hit a two-year high and is rising at its fastest rate since the last recession; that consumer debt is now more than £1.1trn; that there have been 30% more bankruptcies in 2005 than in 2004; that taxes are on the up and that consumption (which makes up over 60% of our GDP) is clearly faltering? The economy isn't remotely robust.

More importantly, however, affordability ratios still tell us that house prices are far too high. The average house still costs five times the average income against a long-term average of 3.5% and first-time buyers, the group who have traditionally supported the market at the bottom end, are still very much priced out of the market. They now account for just 12% of the market. In 1999, they made up a healthy 30%.

Anyone still in doubt as to whether to join the bulls or the bears on the house-price debate could do worse than read of the troubles at Countrywide, Britain's biggest estate agent. The group has closed down 54 agencies in 2005 and has issued a string of profits warnings during what it refers to as "a very challenging year". As managing director Harry Hill told the Daily Mail, "It has been a desperately poor year. And anybody who says anything other does not have the information or is telling lies."

So, given all this, why on earth are the bulls sticking to their guns? Property website Rightmove.com is forecasting a 4% rise in house price in 2004, taking average asking prices "through the £200,000 barrier", while Nationwide is looking for a rise of 0%-3% (although it does say that in a worst-case scenario prices could fall 2%).

One answer is that most commentators on the market tend to have a vested interest in it and it is therefore tough for them to be bearish (why would a mortgage lender want to put you off buying a house by forecasting falling prices?). But the other, says Jim Pickard, is that people tend not to notice that they are in a market slump until they are right up to their necks in it.

Look back at the press cuttings from 1991 and 1992. Then, even as prices were falling, "bullish forecasts" were all over the place. In August 1991, both the Halifax and Nationwide were still predicting increases of 3% for the year.

It's the same with the general population. With the boom of 2002 and 2003 in their minds, they can't quite accept that the good times are over, any more than they could in the early 1990s. Still, back then optimism never translated into reality prices fell 40% in real terms before the bust ended and it is no more likely to do so this time around.

The forecasts for 2006 house prices

Estate agents are wheeling out their forecasts for 2006 and, with stunning predictability, not one expects house prices to fall. Mortgage broker John Charcol provides the most optimistic forecast of 5.5% growth. But the general consensus among the rest is a house price growth of around 3%.

Only one, Savills, seems to be confronting the truth. They predict flat growth for 2006, which means they expect prices to fall by 2% in real terms. Moreover, behind their forecast 0% growth, "there will be big regional variations", Jim Ward at Savills told The Sunday Times. 2006's regional winners are expected to be London and the southeast. This year, prices in central London are up 1.7%, the suburbs only managed 0.4%, and elsewhere in the southeast there was actually a 0.2% fall.