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Is that a new boom on the far horizon?

Richard Northedge identifies the signals that will tell us when the property slump has passed its lowest point

29 October 2008

12:00 AM

29 October 2008

12:00 AM

The real economy has taken only the first step towards recession but the housing market has already clocked up four successive quarters of negative growth. Indeed, house prices have now fallen further in 13 months, according to the Halifax, than they plunged in the whole three years of the 1989-91 crash. And like the rest of the economy, the housing scene is still deteriorating.

But for those who see the glass half full rather than half empty, from now on a series of signs will justify a degree of optimism in the housing market. We’re probably not halfway into the property slump yet, but we should be very soon — and from then on, the market will be coming out of recession rather than going in.

First, by some time in December, average UK home prices will have fallen back to their long-term trend line. They won’t stop falling, of course, and the undershoot below that level could be as sharp as the overshoot was at last year’s peak — suggesting a slide of around 30 per cent by the time the market bottoms and turns back up towards that trend line.

Next, watch for a reduction in the annual rate of fall. The Halifax index showed a 1.3 per cent annual decline in March, nearly 9 per cent by June and more than 13 per cent for September. The fall for 2008 could be 16 per cent and will peak at nearly 20 per cent next spring. After that, prices will still be falling, but less steeply.

And as the rate of decline diminishes, there’s a good chance that by late 2009 there will be a month when prices do not fall at all. A single positive month may seem a rogue figure, but it will be the first rise since this April, and thus worth a headline to cheer the market.

Long before then there will have been more interest rate cuts. They alone will not turn the market, but they provide comfort — and a stronger boost could come from the stamp-duty holiday announced in September. It hasn’t had the slightest impact on the market so far — but then why would it? Who would rush to save 1 per cent tax on purchasing a property likely to lose at least 10 per cent of its capital value within a year? Come next summer, however, anyone buying a home for under £175,000 — that was the national average price when the Chancellor announced the stamp-duty holiday, but the average will be significantly lower by next year, exempting even more properties — will have good reason to make sure their deal goes through before the September deadline for the end of the holiday. Those estate agents still in business will have ‘Hurry while tax-break lasts’ signs in their windows.

Watch too next year for the bottom of the fall in monthly sales volumes. More deals will mean a more liquid housing market that attracts more buyers. And by next year, the nationalised banks should be lending again — not at 2007 levels, as ministers want, but sufficient to meet increasing demand from buyers who will by then have had time to save the bigger deposits lenders require. The oversupply of new homes should, meanwhile, have disappeared.

By 2010, months when prices rise should become regular and the annual rate of decline will reduce to single digits for the first time since this summer, quickly turning to a modest year-on-year increase. Don’t underestimate the value of such good news — or at least an end to the constant flow of negative headlines. Every month, the big lenders, a handful of estate agents, their trade bodies, the Bank of England and the Land Registry each announce new lows in prices, lending or sales. But what looks like a dozen bad stories is actually the same gloomy picture being reported a dozen times.

And don’t ignore the potential feelgood factor from a general election. If a David Cameron victory generates half the euphoria that accompanied Tony Blair’s arrival in Downing Street — or Margaret Thatcher’s in 1979 — the public will be eager to restart lives that have been on hold. Transaction levels were low before mid-2007 because many could not afford high prices; they are even lower now because few want to buy an asset plunging in price even if banks would lend: yet the longer sales remain depressed, the greater the pent-up demand that will eventually be released.

I would bank on the housing slump ending in 2010 after further falls — this is as much guesswork as forecasting — of around 12 per cent next year. However, a statistical trick will delay the good news: lenders will still be reporting annual decreases in prices even when they are rising. The market can rise strongly for several months, but earlier falls ensure a year-on-year fall despite the recent upward trend. The same lag meant the Halifax was showing an annual rise until this March, despite prices falling steadily since the previous September.

But as prices stabilise, banks will ease their lending terms. They are demanding 25 per cent deposits to ensure they still have good collateral cover after values fall: once they don’t expect prices to drop further they can safely increase the loan-to-value ratio, meaning buyers will need smaller deposits.

There are negative factors that will weigh on the property market of course, not least the effects of the wider recession that is only just starting. Pent-up demand will be depressed by worsening job prospects — and actual job losses will mean more repossessions if owners cannot meet mortgage payments. Negative equity — afflicting an estimated 1.2 million home-owners if prices fall 30 per cent — will deter many people from trying to move house.

And some buyers will remain wary because of perverse market psychology that is often echoed in lenders’ behaviour. Conventional economics says consumption increases when prices fall: housing economics shows people purchase at high prices expecting them to continue rising but don’t buy when prices are low for fear they will fall further.

If the market bottoms in 2010, this housing recession will have been shorter than the last, though probably twice as deep. But stability is not recovery. A 30 per cent price-fall will knock values back to 2003 levels. After the last recession it took until 1998 before prices returned to their 1989 peak; on that basis, last year’s prices would not be seen again before 2016 — and that assumes (probably correctly) the mortgage lenders resume their bad old ways.

Sages said after the 1980s property boom turned to bust that the rollercoaster ride would never be repeated. They were wrong then and it would be equally wrong now to claim the market will not soar again. But it will take a mighty boom to undo the current damage. Another mathematical trick means that if prices fall 30 per cent, they must rise 43 per cent to return to the starting figure. Still, the sooner we get through the slump, the quicker we can get started on the new boom. Housing began its recession long before the rest of the economy: keep your glass half full and watch for the signs of property recovering first too.

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