The house price falls for 2011 have only just begun

So much for the great house price recovery. Nationwide numbers just out tell us that prices fell another tiny bit in December. That means they ended 2010 down just over 1%, and that they are still 13% off their 2007 highs. Add in inflation and it is more like 20%.

You could say that this very big number suggests the fall is all but over. I suspect it is not. The house-price-to-income multiple is still way above its historical averages: it’s long-run level is somewhere between three and four times and it is now something between five and seven times depending on what data you use. That is slowly changing, for the simple reason that real wages are falling less fast than real house prices (around 3% versus 5% last year). But a shift of 2% a year isn’t going to get us to fair value in a hurry.

However, the real reason we should expect house prices to keep falling – in both nominal and real terms – is, as ever, simply down to supply and demand. Supply isn’t unusually high at the moment. This might change when interest rates rise and the market floods with forced sellers. But that hasn’t happened yet.

However, demand is unusually low – and set to stay that way. In December, the Bank of England reported mortgage approvals for house purchase down 10% to 42,563 from November’s 47,287. This compares with 58,807 approvals a year ago and a peak of 129,168 in November 2006.

This is likely to continue, largely because the banks, despite talking a good talk and appearing to offer many new deals, are lending out as little as possible. As Michelle from Moneyfacts.co.uk points out, the UK mortgage market is a bit “see but don’t touch”. Lenders’ windows are jam-packed with best-buy deals, but that doesn’t mean they are actually “wanting to lend” to you.

Instead, they are pulling good deals as soon as they get too popular and citing all sorts of affordability criteria in their efforts to excuse themselves from transactions: note the news that lenders are now frequently agreeing to lend less to people with children than to those without. (Personally, I think they’ve got this the wrong way round. I’d be more likely to lend to lend to people who do have children and have already adjusted to it than to a childless double-income couple who plan them but have no idea how much they will cost – and no idea that they are more likely than not going to end up living on one income).
 
Either way, you get the point: given the reluctance on the part of the banks to expand into the market, it’s no wonder that net mortgage lending growth is almost non-existent and mortgage approvals are in freefall. None of this bodes well. If you look at our chart here you will see that, in general, mortgage approval numbers lead the index by four months or so. If this pattern holds, then they’ll be leading house prices down, down, and down again.

That may even be the case at the top end of the market, which in many cases has been relatively well insulated so far: findaproperty.com claims that over the last month, the bigger a house, the faster it is losing value. Five-bedroom houses have, says the site’s data, fallen by 2.4% in the last four weeks. We should expect that fall to pick up speed as the new 5% rate of stamp duty comes in on houses priced at over £1m in April.