Property bubble: the hissing sound begins

published 4 January 2008

"The housing market has turned," said Sophie Brodie in The Daily Telegraph. Nationwide has now reported the first slide over two consecutive months for seven years, while the Halifax index, down 2.4% since August, has fallen for three months in a row for the first time since the end of the last slump.

Leading indicators, such as buyer enquiries, are signalling a larger fall in demand than that seen in 2004-2005, when house-price growth slowed sharply, while mortgage approvals are 40% down on this time last year, according to the British Bankers' Association.

Halifax and Nationwide both expect prices to stagnate this year "about as close as anyone with a vested interest could ever come to predicting a drop", noted Chris Giles in the FT while Morgan Stanley foresees a 10% decline.

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Why the property market is vulnerable

Optimists hope that the market will simply level off and then rise again, but that ignores "the past 60 years of peaks and troughs", said Lex in the FT. There is certainly scope for an early 1990s-style adjustment, noted Capital Economics.

Mortgage affordability, rental yields and the house price/earnings ratio collectively show that the market is overvalued by about 25%. And with two key drivers of higher prices in recent years easier credit and demand from buy-to-let investors "likely to be absent for the foreseeable future", further falls are on the cards.

With scant signs of easing in the credit markets, mortgage credit is henceforth likely to be both more expensive and in shorter supply, said Capital Economics. Higher risk aversion and falling lenders' margins owing to increased funding costs means that we can't count on rate cuts by the Bank of England being fully passed on, and lenders are liable to remain picky.

What next for UK house prices?

Buy-to-let mortgages are dwindling amid tighter credit, and the proportion of landlords selling properties when tenants' leases expire rose to 6.5% from 6.1% in the third quarter, a three-year high. And once capital-gains tax drops in the spring, selling is likely to rise, according to Jeremy Leaf of the Royal Institution of Chartered Surveyors.

Further clouding the housing outlook is the economic slowdown and possible recession as debt-soaked consumers pull back and higher credit costs hit businesses; unemployment will climb to a ten-year high, reckons the Chartered Institute of Personnel and Development.

Repossessions are already expected to jump to 1990s crash levels next year, as tighter credit means many borrowers on expiring short-term fixed rates will struggle to remortgage, putting downward pressure on prices. The property boom, then, is well and truly over.