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By David Stevenson, MoneyWeek
05 February 2009
Amazing! Just when you’ve got it into your head that this country’s property prices are still in freefall, what happens? Out comes today’s Halifax survey telling us that house prices actually rose 1.9% last month compared with December 2008.
So is the great UK housing slump now over?
I don’t think so.
For a start, the Halifax’s monthly figure doesn’t tell the full story. Home values were down 5.1% in the three months to January, and a full 17.2% lower than the previous year.
Maybe recent cuts in interest rates, which have made mortgage payments more affordable for new homeowners, have tempted a few buyers into dipping a toe in the water. After all, the average borrower now pays 21% of his gross monthly earnings towards his mortgage, compared with 31% in the first half of 2008, says the Halifax. What’s more, the house price-to-average earnings ratio has dropped to around 4.5 times in December from 5.84 at its peak in July 2007.
But to put such a move into context, that’s still 10% higher than the long-term average ratio of 4 times (going by the Halifax’s figures). In other words, no reason to get excited.
No market moves in a straight line, and in short, this one-month uptick looks like a statistical freak. Even Halifax itself tried to play down the gain, stressing that house prices rarely go in one direction month after month, even during a prolonged downturn. For example, during the last big property downswing almost 20 years ago, prices fell for seven months in 1989, then rose in three of the first ten months of 1990. That didn’t stop a subsequent two-year 15% price slide.
The Halifax result also completely disagrees with last week’s Nationwide survey, which saw a 1.3% drop in British residential property values last month.
And although the report’s authors claim that: “there are some very early signs that market activity may be stabilising, albeit at quite a low level”, that has to be taken with a huge pinch of salt. Because there’s plenty more bad news heading in the UK housing market’s direction.
Mortgage approvals, a very useful guide to where prices are heading next, remain near a record low. Again, Bank of England figures showed a slight recovery in December in the number of loans approved, but this was still less than half the level of the year before.
And this New Year bounce isn’t likely to last. “The rise simply reversed November's drop – approvals are still 76% down on their peak”, said Vicky Redwood at Capital Economics. “We find it hard to see approvals picking up significantly further when credit is still so hard to get”. Which, of course, spotlights how much more difficult it is to get a home loan these days – a problem that’s likely to continue for a long time for prospective buyers.
But the real trouble for the housing market is only just beginning – soaring job losses.
The UK unemployment rate may already have been climbing for eight months, and have flipped up to 6.1%, the highest for a decade, but we’ve seen nothing yet.
From the current 1.9m, the number of jobless could easily double if history is any guide, according to the latest research from RBS Capital, whose analysts have been researching a series of major financial crises since 1929. That in turn will translate into more property price pain – a drop of at least 20%, says RBS, over a period up to five or six years. Capital Economics even sees a further 20% decline in British home values in 2009 alone.
The message is clear: don’t be fooled by today’s Halifax figures. House prices still have a long way to fall.
