UK Housing Bear Market Has Begun - House Prices Fall for Two Consecutive Months

By: Nadeem_Walayat

Britian's biggest mortgage bank HBOS's monthly house price statistics revealed that UK House prices fell by 0.5% in October to £197,248. This follows a 0.6% drop in September, which is the first consecutive drop in house prices since May 2005, as the credit crunch hit the UK mortgage banking sector and five interest rate rises to 5.75% started to impact on affordability. The trend in UK house prices is now in line with the Market Oracle forecast for a 15% decline over the next 2 years as of 22nd August 2007.

Housing market activity is declining with Mortgage approvals to fund house purchase falling by 6% in September and approvals in 2007 Quarter 3 were 11% lower than in 2006 Quarter 3. New buyer interest in purchasing a house fell for the tenth consecutive month in September, demonstrating that potential buyers have become more cautious.

Despite the bad news, the Halifax's chief economist (Martin Ellis) gave an up beat take for the mortgage bank, commenting :

" House prices fell by 0.5 per cent in October. Prices in the three months to October were 0.3% higher than in the previous quarter – a good guide to the underlying trend - continuing the steady easing in house price growth since the end of 2006.

The rise in interest rates since August last year and negative real earnings growth so far this year are curbing housing demand, leading to a slowdown in both price growth and activity.

The UK economy is in a strong position. Sound market fundamentals, including high levels of employment and a shortage in the number of properties available for sale, will continue to support house prices."

HBOS also states:

Sound fundamentals underpin the housing market……

The continuing strength of the UK economy and the associated expansion in employment will provide a sound underpinning for the housing market over the coming months.

Gross domestic product (GDP) increased at an annual rate of 3.3% in 2007 Q3, comfortably above the long-term average rate of 2.5%. (Source: ONS)

The number of people in employment has increased by 82,000 over the past year to a record total of 29.10 million. There was a 22,000 increase in employment during the three months to August compared with the preceding three months. (Source: ONS)

Unfortunately as is usually the case, the mortgage banks such as Halifax are likely to only acknowledge the dire state of the UK housing market AFTER the event i.e. after house prices have fallen for some time, which was the case during the last housing bust when bullish commentary continued for several years as house prices fell. Economic growth tends to be overstated as true inflation is much higher than the price deflator used to calculate real GDP growth. Additionally employment tends to be a lagging indicator for economic activity by between 6 and 12 months and ignores the high level of persistent unemployment as a consequence of migrant workers.

The Market Oracle's New enhanced affordability index indicates that UK house prices are now at extreme levels of unaffordability not seen since 1989. The indicator also clearly shows why house prices were extremely under valued for nearly 8 years right into 2002, when many housing pundits were prematurely calling for a UK house price crash without doing the sums on affordability. I.e. such as Andrew Oswald, Professor of Economics, Warwick University who published "The Great 2003-2005 Crash in Britain’s Housing Market". and various house price crash websites that sprung up around that time.

I also refer first time buyers to my article - Buy Or Rent A House in the UK - Five Scenarios of Gains or Losses's over the Next Five Years , which concluded that house prices needed to rise by 2% per annum for first time buyers to break even on a property purchase as against renting at this time.

Note - The UK House Price Affordability Index takes into account the following variables - Average Earnings, Average Household Disposable Income, UK Interest rates, Average House Prices , Mortgage Costs

By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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