Cover Story

UK house prices first fall for 12 years

Property sales may fall by 40% this year because of the credit crunch, warns the Royal Institution of Chartered Surveyors (Rics). Such a property sales decline would represent the largest shrinkage in the housing market since modern records began and could cut consumer spending by eight per cent. What’s more, in its updated forecast for the housing market in 2008, Rics has predicated that overall prices will fall by as much as five per cent.

Rics’ Chief Economist is Simon Rubinsohn, who admits the outlook is worrying. “Money looks set to remain tight and many will continue to find that access to the market is restricted by cautious lenders.” He believes such an outcome will have important ramifications for the wider economy. Were Rics’ predictions to come about, there will be around 700,000 fewer residential and commercial property sales in this year than there were in 2007.

Recent market indicators support Rics’ forecasts. UK property rises fell by 1.1% in April, the sixth monthly decline in a row, and were down 1% from the levels seen in April 2007, reports Nationwide. The building society says such price falls reflect a weakening market which had been hit by “poor affordability and tighter financial market conditions”. The latest fall means that the average UK home now costs £178,555, which is £1,759 lower than April 2007.

This gloomy prospect has been confirmed by Halifax’s price survey, prompting the forecast of a “modest (low single digit) decline in UK house prices this year”.

The Halifax adds that any declines must be viewed in the context of the significant price rises over recent years. “UK prices have increased by 171% over the past 10 years and by 51% over the last five years.” According to the Halifax, the average UK property price has risen by £120,860 during the past decade, from £70,696 to £191,556.

More detailed scrutiny of Halifax’s survey shows that there were house price falls in six regions with the biggest falls in West Midlands (–5.0%) and Wales (–4.7%).

Homebuyers in a stronger position

Buyers have been putting down bigger deposits than in previous cycles. The Halifax found that 82% of all new borrowers put down a deposit of more than 10% of the house price during the final quarter of 2007. By contrast, 56% of new borrowers put down a deposit of more than 10% in 1989 and 1990.

The average deposit put down by a first-time buyer (FTB) in 2007 (£34,381) represented 20% of the purchaser price, compared with 12% in 1989. Only 5% of FTBs took out a loan of 100% or more of the purchase price in 2007, compared with 35% in 1990.

More than a third (35%) of owner-occupiers in Britain own their home outright. (There are 11.8 million households with a mortgage and 6.3 million households owning outright.)  In addition, nearly one in four (25%) of properties bought each year are bought with cash.

Total house sales have been much lower in the last few years compared with the height of the 1980s boom. There were, on average, 1.15 million transactions in England and Wales in the last three years (2005–2007). This was a third – 560,000 – lower than in 1988, when there were an estimated 1.71 million transactions.

First-time buyers also account for a significantly smaller proportion of new mortgage borrowers: 30% against nearly 50% in the late 1980s.