Why house prices will keep falling - fast

Worried about the housing market? Well you shouldn't be. Or so says Graham Norwood in The Observer. Why? Because we aren't building enough houses to meet government house building targets. Gordon Brown's plan was to make sure that 240,000 to 297,700 houses were to be built every year until 2016. Yet this year, a mere 110,000 will end up being built and next year we can expect to see no more than a "dismal 55,000."

The result? "Supply has fallen so far behind demand that an upturn is inevitable." So convinced of this is Norwood that he quotes without question a forecast from who else The National Housing Federation, that suggests the average house price will rise 25% from its current levels by 2013. "Demand is going up while the supply of new houses is going down," says NHF chief executive David Orr.

There's no shortage of houses - there never was

This is all total complete and utter nonsense. It is true that Brown's targets will not be met, but that doesn't mean that the shortage of supply is getting worse - mainly because there was no shortage of supply in the first place. If there weren't enough houses in the UK, why would Paddington Basin home to hundreds of new build flats be pitch black at night? Why would the centres of Leeds and Manchester be jammed with empty and utterly unlettable, let alone unsaleable flats? And how would the FT magazine have managed to find several almost entirely empty housing estates to base a cover story on last weekend?

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Over a year ago (when there were a good 100,000 houses fewer in the UK than there are now), Paul Holmes of first time buyer forum Firstrung was pointing out that 50% of new build flats in Manchester were unoccupied, and that by his counting, there were 750,000 empty houses in Britain. The Empty Homes Agency has a higher number: it estimates that there are more than 840,000 empty homes in Britain. That's almost 4% of our total housing stock. And even the Federation of Master Builders who you would have thought would have a vested interest in keeping the lack-of-supply myth going put the number of empty houses in the UK at around 700,000.

So there's no shortage of houses here. Instead, on the face of it, there is actually a good degree of over-supply in the UK market. And with every house built, there's more over-supply. David Orr says that "the supply of new houses is going down", but it isn't of course. The rate of growth of the supply is simply slowing. We've got enough houses and we're getting more every day.

And there is very little demand for property

So what of demand? It is "going up" says Orr. Is it? Really? Theoretically maybe - in that, with our modern day senses of entitlement, we all think we should have bigger and better houses than we currently do. But not actually. The demand for houses isn't about what we want. It isn't about wishful thinking. It's about the availability of credit the actual ability of people who want houses to buy houses. And the current lack of availability of credit there are many fewer mortgage products out there than before, and the remaining ones are pretty pricey - means there is very little demand for houses.

That's why mortgage approvals are at record lows. And that's why house prices have fallen 12% in the last year. It is also why they are going to keep falling, fast. Not long now and that lack of demand is going to be met by a huge flood of supply on to the market. And this will be no ordinary supply. It will be desperate supply. The unemployment numbers are beginning to tick up and as we move into recession, they are going to soar. And as the newly unemployed move into default on their mortgages, so their houses will move on to the market.

Worse, from a homeowner's point of view, they will, as they do so, meet a wave of sales from the buy to let industry. Anyone who bought at the peak on a two-year fixed rate mortgage two years ago is just about to find they have to refinance. It won't be cheap. And odds are it will mean that their cash flow turns negative. So will they stick or will they sell? In an environment where the 'value' of their 'investment' is falling by 10%-plus a year, I suspect they'll sell. This is a proper crash now one caused by too much supply and not enough demand.

House prices up 25% from their current levels by 2013? In Graham Norwood's dreams perhaps. But only there.

This article is taken from Merryn Somerset Webb's weekly Money Sense email. Sign up to Money Sense here.