Get ready for the housing crash part II

After the usual `spring bounce', what's next for property prices? Here are five reasons to fear the future...

According to the Halifax House Price Index (HHPI), the average price for a UK home peaked at just over £200,000 in the third quarter of 2007. Here's how sharply they've fallen since then:

House prices go down...

Source: Halifax House Price Index; seasonally adjusted

As you can see, prices fell for six quarters in a row, before bottoming out in the first quarter of this year. The second half of last year was particularly brutal, with prices falling by 2% a month. In 18 months, the price of a home plunged by more than a fifth (21%), losing £42,264 on average.

...and then rebound

However, as happens almost every year (except in 2008), we've enjoyed a 'spring bounce', when prices move upwards as winter ends.

Halifax reported a climb of 0.8% in August -- the fourth monthly rise this year. Nevertheless, house prices in August 2009 remain a tenth (10%) lower than in August 2008.

This yearly rebound has led many relieved housing gurus to predict an imminent end to the crash which began two years ago with the credit crunch. However, I'm not convinced. After all, in the previous housing crash, house prices didn't hit a low for more than six years, with prices falling by more than a third in some regions.

Hence, in my view, we're not even halfway through our burst bubble, which is why I have no plans to buy a house before 2011 at the earliest.

Here are five reasons for my reluctance to climb back onto the property ladder:

1. Credit conditions

After being bailed out by taxpayers, our battered banks made a promise to the Prime Minister and Chancellor that they would lend more to homebuyers. Alas, the latest quarterly Credit Conditions Survey from the Bank of England shows quite the opposite.

In fact, credit conditions actually tightened in the three months to mid-September, with the cost of home loans rising and availability falling.

However, corporate credit (lending to businesses) is improving, with rates coming down and availability improving.

All this suggests that the banks are happier to lend to businesses than to homebuyers. Although lenders have failed to keep their promise, they do expect to loosen their mortgage-lending criteria in the final quarter of this year.

Let's see if this actually happens.

In summary, given that the availability of 'easy credit' is essential for a healthy housing market, recent credit trends suggest that we have a long way to go yet.

2. Interest rates

The one thing -- the single biggest prop -- providing support for homeowners and house prices is low interest rates. A year ago, the Bank of England base rate stood at 5%; for the past six months, it has been 0.5%. This is the steepest fall in the base rate in the Bank's 315-year history.

As the base rate has plunged, so too has the cost of variable-rate home loans, sending mortgage payments sharply lower. Sadly, mortgage rates haven't fallen as steeply as the base rate, because lenders have taken the opportunity to massively increase their profit margins.

Of course, low mortgage rates mean better affordability, which is a key factor influencing the property-buying decision. The big problem as I see it is that, for the base rate, the only way is up. After all, we're within two quarter-point cuts of a zero base rate, so there's not much left in the tank.

Hence, when the base rate eventually begins its upward climb (not expected before late 2010), millions of mortgage borrowers will suffer severe 'payment shock'. For me, this could be the trigger for another downward leg in property prices.

3. Personal debt

My other big worry is the massive increase in personal debt since house prices began to take off in 1995. As you can see from the following table, growth in personal debt has far outstripped rising personal income:

Source: Office for National Statistics; Bank of England

As you can see, over the 13 years from 1995 to 2008, our total disposable income rose by more than four-fifths (82%), from £504 billion to £919 billion. Incredibly, over the same period, our personal debt more than trebled, rising from £460 billion to £1,457 billion -- up £998 billion.

In other words, Britain now labours under an extra trillion pounds of debt that it didn't have at the start of the last housing boom. This burden will constrict consumer spending and house prices for years to come, especially when taxes rise and public-sector spending is cut.

4. Unemployment

As I explained in How job losses affect house prices, there is a strong link between unemployment and property prices.

This makes sense, because house prices and the number of people in work both go up during the good times, but fall when the economy goes into recession.

The latest figures from the Office for National Statistics show that in the 12 months to July 2009, the number of unemployed people increased by 743,000.

In other words, that's almost 2,000 jobs lost every single day of the year. To me, these are the real victims of the credit crunch.

Of course, when people lose their jobs and claim benefits, this hits the public finances twice, thanks to lower tax revenues and higher social-benefits payouts. Fear of unemployment also hits confidence, making workers less likely to pay high house prices. Unemployment also increases mortgage arrears and repossessions.

In the three months to July 2009, the unemployment rate hit 7.9% -- its highest level since November 1996. Alas, it is expected to continue rising into 2010 as companies reduce their expenses by cutting jobs.

All of which adds up to more bad news for property prices.

5. Weak recovery

In addition, I'm pessimistic about the strength of the UK's economic recovery.

From the second quarter of 2008 to the second quarter of 2009, the UK's gross domestic product (GDP, a measure of national output) fell by a whopping 5.5%.

Happily, the economy is expected to have bounced back in the third quarter, with a return to growth. Economists predict a 0.3% increase in GDP from Q2 to Q3, which makes a formal end to the recession which began last year.

The bad news is that, during our long credit-fuelled boom, we've grown used to the economy growing strongly, sometimes by more than 3% a year. Hence, with the coming recovery expected to be as weak as a kitten, it will feel like a continued recession to many of us.

Finally, I don't expect sceptical readers to buy my arguments. As former US President Lyndon B. Johnson once remarked, "[Quoting economic statistics] is a lot like peeing down your leg. It seems hot to you, but it never does to anyone else."

More: Find a cheaper mortgage | Nothing good comes of this recession | The joys of renting