Your home's value is about to drop

Mortgages and Home

Updated on 28 April 2010 | 21 Comments

The housing market has staged an impressive recovery for the past year, but things may be about to go very, very wrong

I bought my first home last February, and with the benefit of hindsight it looks like I got the timing pretty much spot on. Since then, house prices have consistently increased, albeit at a fairly pedestrian pace.

Indeed the only recent month in which house prices fell, that was more to do with snow which brought the nation to a standstill, rather than any particular problems with the housing market.

All in all, it looks like I got lucky – I bought at the very bottom of the market, and it’s all been rosy since. Not only have prices risen, mortgages have slowly become more competitive, and confidence has started to reappear here and there about the prospects for the housing market.

So why do I think things might be about to turn ugly again?

Slim pickings

Sentiment plays a big part in the housing market, and that was particularly true last year. Because the market had been through so much turmoil from 2007 onwards, a number of sellers had decided it was a bad time to be trying to sell their homes. House prices were falling, and they didn’t want to be shortchanged, so many withdrew their properties from the market – thinking they’d wait until things got better, and they were more likely to get good value.

John Fitzsimons looks at some simple ways to boost the value of your home.

However, demand didn’t exactly disappear. It’s something about the water in Britain I guess, but it’s in our nature to want to own our own home. And despite the difficulties in the mortgage market, there were more people actively looking to buy a property than sell one.

The laws of supply and demand kicked in.

As a result, in Spring last year, prices started to go up. And as prices started to move northwards, so too did confidence. A few more sellers dipped their toes into the market, but even more buyers appeared too.

We then saw seven straight months of house price rises according to the Halifax. This only came to a halt as a result of the snow (while the end of the Stamp Duty holiday didn’t help) before the small rises began again.

A rocky road ahead

And the headline rates in the various house price indices and studies would have you believe that things are back on a steady footing. Indeed, just last week Rightmove confirmed there had been a 2.6% increase in asking prices on the portal, surely a sign that things are on the up in the housing market.

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Sell your home

If you want to obtain the best possible price when selling your home, then these ideas should help.

However, the one stat that should shine out to us all like a beacon of warning comes from the Royal Institution of Chartered Surveyors. In its housing market survey for March, it reported that for the third straight month, new instructions (in other words, new sellers) outpaced new buyer enquiries. That’s three straight months this year in which more people have come to the market looking to sell than to buy.

What’s more, the ratio at which they are outnumbering buyers is increasing too – the net balance of new sellers reached 21% in March, up from 16% in February, while the number of new buyers didn’t budge.

Prices to slow... or fall?

Here comes our old friend suppy and demand again. If sellers continue to outnumber new buyers, the best case scenario is that house prices stabilise.

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That’s what is most likely to happen, according to the lenders themselves - the Bank of England’s Trends in Lending report last week confirmed that the major UK lenders have said they expect house prices to remain flat for the rest of 2010.

But it’s not hard to see a situation where house prices start to fall again. With all of the major parties promising significant cuts following the General Election, it doesn’t take Mystic Meg to see that unemployment has a decent chance of rising by the year’s end. A hung parliament (and subsequent second election) might also spook the markets to the extent that everything is thrown up into the air once more.

Add to that the fact that interest rates can only go one way...

It wouldn’t take a lot for this stability we are currently enjoying to vanish, and then the rug really would be pulled from under the housing market.

Cheaper housing is good, right?

It’s around this point that some of you will be whooping with delight. Cheaper house prices are just what’s needed, right? Too many first-time buyers can’t get onto the property ladder as it is. A proper fall in house prices is not only overdue, but necessary.

Right?

Maybe, but I’m not convinced. The problem for first-time buyers isn’t house prices, it’s lenders. In many areas rents are about the same level as mortgage repayments, so buying would not stretch their budgets on a monthly basis that much. But the reason many can’t take the plunge is that lenders generally aren’t interested unless you have at least a 10% deposit (and even then you’ll be paying through the nose). 

The average first time-buyer pays £126,218 for their first property in the UK, according to this recent Halifax report (PDF). How many first-time buyers do you know with sufficient savings to cover a 10% deposit on a home worth that much?

Now I know many people get all in a tizz at the thought of high loan-to-value lending. After all, Northern Rock lent out 100% mortgages (or even higher) and look at the state of them!

But as I’ve always maintained, the problem isn’t high loan-to-value lending itself, but rather lending at such ratios to inappropriate borrowers, those that simply cannot afford them. So long as the borrower can make the repayments, is there really that much difference between lending 90% and 95% for example?

What’s this got to do with house prices?

So what does this have to do with house prices? It’s not just buyers and sellers that are influenced by sentiment in the market – the lenders are too. At the moment they are just, very slowly, starting to warm to the idea of lending mortgages to first-time buyers at higher loan-to-values precisely because things have seemed pretty rosy for the best part of a year now.

Recent question on this topic

However, if house prices start to fall again, I think the lenders will get all jittery again and we are back to square one. What’s needed is a more protracted period of stabilisation and modest house price growth, so that the lenders start to loosen up their lending criteria to new entrants.

Obviously this isn’t sustainable forever – if the last few years have taught us anything, we should all be clear that house prices cannot go up and up until the end of time. Maybe at some point there will be the dramatic correction in house prices so many of you think is coming. Personally, I doubt it.

But in the short-term I believe that continued stability is essential to give first-time buyers (and by extension, the housing market itself) a sorely needed boost.

What do you think? Let us know your thoughts on the future of the housing market using the comments box below, or ask a question about property on our Q&A discussion board.

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