Hopes for housing market recovery dashed

Hopes of a quick turnround in the UK housing market were dashed on Thursday after two new surveys underscored the continued decline in UK house prices, with the average home now changing hands at prices last seen in 2004.

The Nationwide building society’s house price index showed a 0.4 per cent drop in April, after showing a rise of 0.9 per cent in March amid conflicting signals from other house price indices. Thursday's fall left the price of an average house at 18.4 per cent below the peak in October 2007.

The Land Registry’s official index for March, which includes transactions that may have happened up to three months earlier, showed a similar 0.4 per cent drop. However, it contained good news for London homeowners – prices in the capital rose in March for the first time in a year.

On Thursday, the Council of Mortgage Lenders, a trade association representing mortgage providers, forecast that the amount of new money extended for loans was likely to be around £25bn less than repayments of principal in 2009.

The CML also said that serious delays in mortgage repayments were likely to rise to more than 4.4 per cent of all home loans – up from 1.8 per cent at the end of last year – while repossessions would also rise sharply. Cautioning that its forecast is “our best estimate of a direction of travel, rather than a precise analysis”, the CML said that the economy would continue to deteriorate this year.

Fionnuala Earley, chief economist at Nationwide, said there were few reasons to expect house prices to rebound any time soon, despite measures in the Budget aimed at stimulating house purchases – including an extension of a stamp duty holiday for low-priced homes and plans to expand access to mortgages via the capital markets.

“The availability of credit is only part of the reason why the housing market is in the doldrums,” she said. Demand for housing loans was also falling, she said, noting widespread expectations that prices were still on their way down.

Moreover, wider economic conditions were likely to play a bigger role in determining housing demand.

”The housing market is very sensitive to income and, as a result, conditions in the labour market are crucial to its performance,” Ms Earley said. “The economy is now in the deepest recession since the second world war and unemployment is continuing to increase, with the latest data showing that it breached the 2m mark.”

However, Howard Archer, economist at IHS Global Insight, said the latest data provided encouragement that the underlying rate of decline in house prices may be easing. The three-month on three-month rate of decline – often considered a more stable measure of house price movements – showed prices down by 3.1 per cent in April from 4.1 per cent in March.