Stay away from property, it has much further to fall

When I went on maternity leave at the end of last year, I promised myself that, on my return, I would write no more columns about the property market.

But when I made that promise, I did so on the assumption that the argument was over, that everyone agreed we were at the beginning of a truly nasty property crash that wouldn’t be over until prices were down a good 40%. It turns out it isn’t so. When I emerged from milk and nappies just a month ago, I did so to a nation that was still intent on ruining its finances – mortgage payment by mortgage payment.

Country Life tells me that 2009 is offering me the opportunity of a lifetime to buy a country house, the ever-optimistic Stuart Law of Assetz is blogging that we should “make no mistake, the house price recovery is here“, my inbox is jammed with promotional emails from the likes of Progressive Property explaining how they can help me build a property portfolio “which will grow by £50,000 a year” – and I can hardly move for the developers lining up to explain how and why March marked the bottom of the property market.

Looking at the few bits of data that have been released in the last few days, a casual observer might think that all this makes some kind of sense.

This week, we found that February’s mortgage approvals were up to 37,900 – the highest monthly level since May 2008. Numbers from Mortgage Brain also showed that the number of mortgage products on the market is on the up too: by the end of March there were more than 3,000 on the market – an increase of 13%. Then, most excitingly of all, came the Nationwide house price data, which showed that the average house price in March was up £3,000, or 0.9%, to £150,000.

One small developer even told me he can “feel the bottom”. I’d love to think he was right, (not least because it would give me an excuse to start looking for a house to buy myself) but I suspect all he feels is the beginning of spring.

Let’s start with the mortgage approval numbers. Yes, they are up. But not much. The long-term average since the series began in 1993 is 94,000 a month. So 38,000, a number that is 40% down on last year, is not very encouraging. Much the same can be said of the number of products available: 3,091 might sound like a lot but it is still 80% fewer than this time last year and 30% fewer than even in December. It hardly suggests a return to the days of the easy credit, which drove the bubble in the first place.

Then look at the price data. Only days before the Nationwide numbers, we had the Land Registry numbers. These are the most authoritative we can get, and they showed the decline in house prices actually accelerating. They were down 2% in February – making the annual rate of decline now standing at 16.5%. Note, too, that if you examine the Nationwide quarterly numbers more closely, you see that prices fell 4.2% in the first three months of the year. Looked at like that, it’s hard to get too excited, isn’t it?

The truth is that all real bear markets tend to offer the unwary investor one last opportunity to lose money. The summer of 2009 is probably that opportunity this time round.

There may well be a quite a big pick up in inquiries, transactions and even prices over the next few months. This will be partly down to the fact that, for those who have cash and want to buy at some point, the housing bear market is getting boring – and partly because a lot of property looks cheap relative to its peak price.

But the basic market conditions are still all wrong for recovery. For starters, cheapness shouldn’t be measured relative to peak prices, but relative to historical trend prices. And, on that basis, UK house prices are still totally out of whack: they’ve still got a long way to fall to get anywhere near the usual 3.5 times average earnings. Look at the Land Registry prices and ONS numbers on average earnings, and you will see that the ratio is still well over five times. A house that looks cheap compared with its 2006 price still looks very expensive compared with its historical average.

Still, even if you aren’t fussed about long-term affordability ratios, consider this: for a real recovery to get going now, a very large number of people need to have five things: a job; a firm belief that they will still have a job in five years even as unemployment rises over 3m; a conviction that you can’t lose in the long term with bricks and mortar; a good £20,000 as a deposit; and – most importantly of all – the ability to get a mortgage. Know many people like that? Nor do I.

• This article was first published in the Financial Times


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