Britain's residential real estate market could be headed for a "double-dip" downturn, with stagnant mortgage approvals and falling prices
Further signs that the housing market may be about to enter a "double dip" downturn emerged yesterday when the Nationwide said property prices rose by just 0.1 per cent in June. The trend in house price inflation is clearly down: prices rose by 1.1 per cent in April and by 0.5 per cent in May.
Having seen housing supply artificially constrained last year by banks and building societies allowing borrowers in arrears to stay in their homes, and demand for mortgages heightened by the Bank of England's slashing of interest rates and monetary boost, this year will see a reversal of the mini-boom that saw property values rise 6 per cent during 2009. The tough Budget, rising unemployment, lower confidence and cautious banks seem certain to dampen the market for the foreseeable future.
Martin Gahbauer, the chief economist at Nationwide, said: "Barring a significant pick-up in house prices over the next few months, the annual rate of inflation should continue to drift lower in light of the very strong price increases recorded during the summer of 2009."
Howard Archer, the chief economist at IHS Global Insight, added: "The marginal house price rise in June adds to a recent flurry of soft data on the housing market and further fuels our belief that prices will struggle to make significant gains over the coming months, and may very well be only flat overall through the rest of the year."
Property prices have risen about 12 per cent since a low point in 2009 to stand at an average of £170,111 now. The Land Registry showed prices falling by 0.2 per cent in June.
One major constraining feature of the market is likely to be the unwillingness of lenders to advance mortgages to any but the very safest of credit risks. First-time buyers typically have to find a deposit of £33,000 now, against £13,000 during the boom.
Earlier this week, the Bank of England reported stagnant mortgage approvals of fewer than 50,000 in May. Monthly approvals of 70,000 to 80,000 are needed for a rising market.
A potentially lethal combination of stagnant living standards and declining mortgage approvals is threatening to send the housing market into a precipitous slump.
In separate warnings Tuesday, it emerged that British consumers face a four-year wait for an improvement in their living standards, while a "double dip" recession in the housing market is now "more likely than not," according to City economists.
Bank of England data released Tuesday suggests that the revival in property sales seen during the second half of last year has gone firmly into reverse, with every indication that prices will fall by next year, as lending remains so sluggish.
The Bank reported that mortgage approvals by banks and building societies are running at about 50,000 a month – half pre-crisis levels, and still lower than they were during the early 1990s housing downturn. The news comes as Hay Group, a leading business consultancy, predicted stagnant living standards for the next four years – meaning families will find it harder to service existing home loans, especially if interest rates start to rise next year.
Steve Paola, a spokesman for Hay Group, said: "After a decade of real pay boom, recession and continuing uncertainty are having a negative impact on real pay for the UK workforce. It may be a number of years before we see living standards rising at pre-crisis levels."
The run-up to the toughest Budget since the Second World War, the Greek and eurozone crises and general nervousness in financial markets also seem to be undermining consumer confidence, essential to a more buoyant housing scene and the wider recovery. The FTSE-100 index of leading shares fell to a nine-month low Tuesday, while the European Union's barometer of consumer sentiment in the UK fell for the fourth month in a row, to a 10-month low in May.
In the longer term, tax rises and minimal pay awards also seem certain to restrain the ability of consumers to service large mortgage debts, even when they can persuade banks and building societies to advance a home loan. Continuing fragility in the financial system means a continuing shortage of mortgages, especially for first-time buyers: Some 85 per cent of first-time buyers rely on parental help.
On Monday, the Land Registry revealed that house prices in England and Wales fell by 0.2 per cent between April and May; the general trends in other house price indices have also been slowing, suggesting that some further correction in house prices will be needed to restore the historical relationship between mortgage lending and house prices, given that there seems little chance of a radical improvement in the supply of mortgages from cash-strapped banks and building societies. Recent Royal Institute of Chartered Surveyors surveys have pointed to an increase in sale instructions in the past few months; the stamp duty holiday on properties costing less than £250,000 announced in Alistair Darling's last Budget in March appears to have had little impact.
Paul Diggle, property economist at Capital Economics, said yesterday that a double dip for house prices was "more likely than not" and predicted a 5 per cent decline over the course of this year: "The longer that mortgage lending remains soft the more likely it is that last year's house price gains will be reversed."
The unusual and unexpected strength in house prices last year – up by 6 per cent in 2009 – was put down by those in the market to a "shortage of supply." That, in turn, seems to have been because of an unwillingness on the part of many lenders to foreclose on homeowners in difficulties. Instead, and to avoid adding more write-offs to balance sheets already soaked in red ink, the banks and building societies exercised forbearance to borrowers in trouble, thus preventing a glut of repossessed homes being dumped on to the market, as happened during the 1990s slump, creating a downward spiral.
However, Mr Diggle added "lenders can't carry on doing that forever" and the Bank of England's last Trends in Lending report offered anecdotal evidence that such patience was coming to an end.
The pressure on the banks will be increased in the coming months in any case as about £400bn in official support to them is due to be withdrawn, and banks will have to turn to wholesale money markets to support their lending. This may prove expensive and scarce, as the sovereign debt crisis has heightened nervousness about their health. The European Central Bank will suck €142bn (£115bn) of its lending to the European banks on Thursday.
The extent of the squeeze on British living standards over the next few years was laid bare by the Hay consultancy group yesterday, who predicted that wage rises will fall badly behind inflation for the next four years.
With median salary growth forecast by Hay Group to reach just 2.4 per cent this year, and inflation rising to 5.3 per cent, according to the Retail Price Index (RPI), pay is falling in real terms for the average British worker for the first time in a decade. Although inflation will drop in coming months, the hike in VAT to 20 per cent in January next year will be an obvious hit to the spending power of family budgets. Reductions in tax credits and thresholds, new higher rates of income tax for the better-off and increases in other taxes such as capital gains tax (CGT) and insurance premium tax will wreak further damage. The higher rate of CGT will make the returns from buy-to-let investing even less attractive.
Hay Group predicts the outlook for the next four years is a bleak one, with typical pay increases likely to remain below inflation.
The forecasts represent a sharp break with the "nice decade": Consistent pay increases over the past 10 years amounted to a 37 per cent boost to salaries, or 9.5 per cent after inflation. In the Budget the Chancellor announced a two-year pay freeze for public sector employees earning more than £21,000 a year.
The Bank of England reported that mortgage approvals for house purchases edged back to 49,815 in May after rising modestly to 49,828 in April. May's level was well down from the recent high of 59,338 seen last November and substantially below the average monthly level of 91,300 since 1993. It is also well below the 70,000 to 80,000 level that has in the past been considered consistent with broadly stable house prices.