Squeeze on loan supply to push house prices lower

The scarcity of low-priced mortgage deals is hitting home sales across the UK – the value of the average property has fallen by 12.4 per cent in the last 12 months due to shrinking demand, according to Nationwide.

On average, a home in the UK now costs £161,797, according to the monthly house price index, released this week by the building society. And the market is not likely to improve in the short-term as economists predict further falls. “The latest fall-out in the property market is not altogether surprising given the turmoil in financial markets over the past month,” says Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors. “The recent increase in some mortgage rates and the continuing squeeze on the supply of loans suggest that further price falls are likely.”

Sales of more expensive homes in London areas such as Knightsbridge and South Kensington have held up a bit better as foreign investors look to benefit from the weaker pound by purchasing high-end properties. But generally the value of properties worth more than £1m has still fallen 10 per cent in the last 12 months in the UK, as the slowdown in the City has damped demand.

Across the country, falls in prices were sharper in the south of England than in the north.

The slowdown in the mortgage market is hitting first-time buyers in particular as they are now required to put down larger deposits. Fewer than 20 per cent of them are now taking out mortgages with loan-to-value ratios of 90 per cent or higher.

Nationwide’s survey follows stark figures for mortgage lending in August from the Bank of England, which found that the amount of money borrowed had collapsed by 95 per cent in a month. The lending figure was also 97 per cent down on August 2007, when the credit crunch began.

While the mortgage drought is hampering house sales, the rental sector is seeing increased demand, apart from in prime London markets where City job losses are prompting landlords to cut rents.

As for how far prices have yet to fall, Lucien Cook, director of residential research at Savills, the estate agent, says: “We expect prices to fall by 25 per cent over 2008 and 2009, stabilise in 2010 and return to growth in 2011.

“Because affordability will have eased considerably by then, the bounce-back may be fairly pronounced, when it comes – with prices in the south of England returning to their 2007 peaks by 2012.”