U.K. House Prices May Decline as Cuts Sap Confidence

U.K. house prices probably will fall the rest of the year as government spending cuts hurt consumer confidence and homeowners try to repay debt, according to economists and property brokers.

“Things aren’t looking too great for the next few months,” said Fionnuala Earley, senior economist at Royal Bank of Scotland Group Plc, which predicts that house prices will fall 1 percent for the whole year. “We’re seeing increases in supply, consumer confidence weakening, and we are going to see real squeezes on disposable spending.”

The government’s plan to reduce the U.K. deficit by slashing public-sector jobs and raising taxes may wipe out gains in property values from the first half of the year, said Lucian Cook, research director at Savills Plc in London. A shortage of mortgage financing will also curtail demand for homes, he said.

U.K. house values rose 3 percent in the first half, according to Nationwide Building Society, the U.K.’s largest customer-owned lender. Lloyds Banking Group Plc’s Halifax mortgage unit, Britain’s biggest provider of home loans, estimates that they fell 1.6 percent.

“Prices have outstripped expectations,” said Philip Shaw, chief economist at Investec Securities in London. “There doesn’t appear to be much momentum in starting this half of the year.”

Values slumped 23 percent from the peak of the boom in September 2007 to the trough in April of last year after losses on U.S. subprime mortgages led global credit markets to seize up, according to Halifax. They are currently at the level they were five years ago.

Costlier Loans

Now mortgages are more expensive and harder to obtain for borrowers who can’t afford a down payment of at least 25 percent.

When the market was at its peak, banks were providing loans as large as five times a borrower’s salary. That helped lift the average house price to a record 6.2 times earnings, compared with the long-term average of 3.7 times, according to Capital Economics Ltd. That ratio has since fallen to 5.2.

At the height of the U.K.’s previous housing boom that ended in 1989, the ratio was only 4.7. Values slumped 13 percent during the next four years. They didn’t return to pre-crash levels until January 1998, almost nine years later, even before adjusting for inflation.

“Prices are still overpriced relative to incomes,” said Paul Diggle, a housing economist at London-based Capital Economics. “We think they will decline 5 percent this year as a whole and our forecast is for falls in the next couple of years.”

Limited Repossessions

Foreclosure rates have risen more slowly than projections by the Council of Mortgage Lenders, as the Bank of England kept its benchmark interest rate at a record low of 0.5 percent since March 2009. That has allowed homeowners to keep paying off their mortgages and helped limit repossessions.

Britons have been paying down debt on concern about job losses and government spending cuts. Consumer debt fell in May for a third straight month to its lowest level in six months, according to the Bank of England. Unsecured borrowing is at its lowest level since September 2007.

Claimants for jobless benefits in the U.K. have almost doubled since March 2008 to 1.46 million in June. They may climb to 1.66 million by the end of 2010, according to the average of 38 forecasts compiled by the U.K. Treasury last month. That is 260,000 fewer than the forecasters predicted in November.

Even so, Shaw said last month that the housing-market recovery in the first half may falter because mortgage approvals remain at 45 percent of their long-term average.

Transactions Slow

There were 25 percent fewer house sales in the first five months of 2010 than in the previous five, according to Savills, the U.K.’s largest publicly traded real estate broker.

“Undoubtedly, prices will fall in the second half,” said Savills’s Cook. “There is more stock coming to the market than people looking to buy.”

At best, Savills expects prices to end the year unchanged from 2009.

The number of real-estate brokers and surveyors saying that new buyer inquiries fell exceeded those reporting gains by 5 percentage points in June, the Royal Institution of Chartered Surveyors reported yesterday. A measure of future price expectations decreased to minus 4 in June, the weakest result since May 2009.

For Sale

The government’s decision in May to scrap the requirement for sellers to provide Home Information Packs resulted in a 22 percent surge in properties being put up for sale in June, Rightmove Plc, the operator of Britain’s biggest property website, said last month.

The number of unsold houses and apartments is at the highest level in 21 months, which may force down prices, and increased capital-gains taxes may also deter buyers, according to Rightmove.

There is a 70 percent chance that U.K. house prices, adjusted for inflation, will be below their peak 2007 levels in 2015 and a 50 percent chance they will still lag in 2020, PricewaterhouseCoopers LLP said yesterday.

Overall projections for Britain’s housing market mask significant regional differences. In the first quarter, gains in London and southeast England outpaced other parts of the U.K., according to Halifax. Values in the capital climbed 6.4 percent from the previous quarter to an average of 273,647 pounds ($415,000). That exceeded the nationwide increase of 0.6 percent to 168,105 pounds.

In the West Midlands, prices rose 0.8 percent to an average of 155,716 pounds. In the northwest of England, they fell 1.6 percent to 126,303 pounds.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

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