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The UK Housing Market - What Happened?
Following years of growth the UK housing market is slumping with an annual fall to date of 10.9%. Here we look at what is happening and where the market is going.
According to the Royal Institution of Chartered Surveyors (Rics) house sales are at their lowest level since their monthly survey began in 1978. The annual fall, according to Halifax Plc, is 10.9% and house prices in August fell by 1.8%. Property prices have returned to the levels seen in early 2006.
There are a number of reasons for the fall. Crucially the credit crunch means that banks are less able to raise funds from wholesale markets and therefore do not have the funds to lend on. In addition, whereas this time last year banks were keen to invest in the housing market, they now see the housing market as a risky investment and want only to lend to buyers who are safe bets. This equates to buyers who have a large deposit plus a good credit score. Long gone are the 100% mortgages and the large salary multiples.
For the potential buyer household incomes are squeezed with higher costs for food, energy and fuel, and with a recession looming employment may not be secure. Such pressures have not been seen for a decade. Furthermore, of the buyers that have secured mortgages they may wait to see how much the market falls.
In a nutshell, there are fewer buyers who have secured mortgages and with fewer buyers there is less demand for housing and so prices have fallen. Some experts predict that prices will fall by as much as 25% in total from peak to trough and the market will begin to recover in 2010. In contrast, the Centre for Economic and Business Research predict a total fall of 15%.
So what will stop the freefall? The UK government announced some, in effect, minor measures: interest free loans, a stamp duty level rise and help for those not affording their mortgage. This was a welcome help but is unlikely to stabilise the market significantly as the key problem is the banks having funds to borrow and then those banks taking the risk to lend.
Hope glimmers as the US Treasury has in effect nationalised the US's two largest mortgage providers, Fannie Mae and Freddie Mac which will protect millions of mortgages and indeed, banks worldwide who are exposed to them. This hugely costly intervention is expected to stabilise the US housing market which in turn will stabilise the US economy. As a result UK banks will be able to secure funds to lend to consumers. However, return to the previous easy lending criteria is unlikely and even when banks have funds to lend they are likely to require the borrower to show that they are a good investment: with a deposit and affordable repayments.
The housing bubble has burst, but the fact remains that the property market in the medium and long term will be backed by the sheer necessity of housing requirements. The population is increasing and there is not enough housing to home everyone. With less sales, property developers are currently short of cash and are putting their projects on hold. As a result new building will be well below the government's targets and as demand outstrips supply prices will go up. Indeed, the Centre for Economic and Business Research expect house prices to rise by 30% between late 2009 and 2012.
And so the UK housing market is expected to be slow into 2009 but as the economy recovers so too will the housing market.
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