Nationwide issued its house price index for September yesterday. It showed that house prices rose on average 0.9% between August and September. The tri-monthly measure, which is less volatile and widely regarded as the more accurate short term indicator rose from a growth of 3.3% in the 3 months ending August, to a growth of 3.8% in the 3 months ending September.

This is the fifth monthly rise recorded by the Nationwide, and the lender now has the average UK house price at the same as it was in September last year -- before the catastrophic collapse of Lehman Brothers.

None the less, this still does not signal the end of the crisis, because -- as even Nationwide acknowledge -- transactions are still far too low to support such growth, leaving it based solely on the drastic shortage of housing supply.

Martin Gahbauer, Nationwide's chief economist said:

"The further increase in house prices is very much consistent with improvements in a broad range of economic and financial indicators over the last few months, all of which suggest that the most intense phase of the recession and financial crisis has probably passed. However, given that the housing market still faces considerable headwinds in the form of high unemployment, restrictive credit conditions and an impending withdrawal of the stamp duty holiday, it would be surprising to see house prices continuing to increase at the very strong rate seen in recent months."

But as we continue to say, house prices make no difference to people who want to sell their house, because you will save what you lose on the house you buy, which will also have lost value. Sell your house with Zungalow for just £29 per year.

By Liam Bailey

Right, so let me start at the beginning.

Firstly, I believe that, though the collapse of the global financial infrastructure was the catalyst, that this house price correction is like any other in the fact that it has gone the way it has because homes became overvalued and unaffordable for first time buyers.

Some people believe that house prices will fall until the average house price is 3.8 times the average salary. I am not one of those people. I believe that this correction will go much the same way as the last correction (late 80s early 90s) and overshoot the long-term averages on the way down.

House prices have been rising for the past few months. The rises are not a true reflection of the market. Short-supply of quality homes in certain areas is causing those properties that are available to be sold for prices similar to those seen at the 2007 peak, and these sales, in a measure of low transaction volumes are enough to distort the overall picture.

Prices are still falling in most places. And they will continue to do so until transaction volumes pick up, so the true question is, when will transaction volumes pick up. There are three hurdles keeping transaction levels down.

1. The Economy/Unemployment

   Though there have been signs lately that we are past the worst of the recession, unemployment is still rising, and is expected to continue doing so for quite some time yet. Until less people are in fear of their jobs or already jobless there won't be sufficient demand for a revival in transaction volumes.

2. Mortgage availability:

   Banks are still under pressure to improve their balance sheets which means making more money from fewer loans. To consumers this means poor deals are on offer to anone who has less than a quarter of the house price to put down as a deposit, and the best deals go to those with deposits of 40% or more

3. Vendor Realism:

   It is a fact that short supply is driving up prices in some areas. But across the UK out of the homes that are for sale, a high percentage of those homes are at prices similar to those seen at peak. Thus, actual saleable stock, that is houses that people will actually buy is short across the country. The correction can't end until the gap between what buyers are willing to pay, and sellers willing to accept closes. This can't happen until more vendors are realistic about the market.

They are three major problems, but for me, the first is the key to recovery in the housing market. But I don't just mean an end to the UK recession and unemployment:

When the global economy has recovered, and stock markets and investments around the world are once again lucrative, when UK consumers are spending and borrowing healthily again, the banks will be making money sufficient that tight mortgage policies are not the only way to improve their balance sheets.

That will take care of number 1, and as a result better mortgages will become available to the masses, which will take care of number 2. This will then result in number 3 resolving itself, because demand will begin to increase and vendors will realise that it is only their price that is preventing the sale.

But as this is a forecast, what you really want to know then is, when do I think the global recovery will happen?

As I said, there are clear signs that the UK is past the worst of the recession, and there are similar signs that the recessionary down-track is passed and we are currently on the way back up, things like: GDP contractions of a lot less than previous quarters, retail sales up (in the EU), Europe's biggest two economies emerging from recession, and more.

I think that the global recovery will be strong in Q3 of next year, and that UK unemployment will also have turned around by this point. It will take time for this to change the attitudes of consumers and the banks, but banks should be more relaxed about their lending, and demand to buy property will start to increase by Q2 2011.

I therefore think that the UK housing market will bottom between quarters 2 and 3 of 2011. Unlike other commentators I think that price growth will be quite brisk in the subsequent few years.

Liam Bailey is a well known property commentator and director of sector specialist SEO copywriting company Write About Property, which provides SEO copywriting services for some of the biggest names in the property industry.

The Land Registry has just released its data on UK house prices in July.

Not surprisingly in the current climate, the Land Registry too has recorded an increase on a monthly basis, in fact the largest increase since 2004 of 1.7%. This has brought the annual rate of decline down to 11.7%.

The Land Registry house price index is widely regarded as the most accurate record of house prices in England and Wales, is showing the annual decline still much faster than the 6.2% recorded by Nationwide last month.

The Land Registry index also showed that there were on average 35,348 property transactions per month between February and May, just over half the 61,743 recorded per month in the same period last year.

As transactions had already plummeted last year, this proves beyond a shadow of a doubt (as far as I'm concerned) that the reason behind the price rises of the moment is not increased transactions because of low interest rates, as Nationwide said yesterday, but the low supplies of saleable stock. (See yesterday's post on the Nationwide index for August).

The Royal Institute of Chartered Surveyors has said that UK house prices will not fall by 10% this year, as they had earlier forecast, but we now look set for house prices to end this year slightly higher than last year.

RICS have also said that mortgage approvals, which have been rising for several months will level off at about 55,000 per month -- still historically low and not enough to bring substantial or prolonged upward pressure on prices.

What is putting upward pressure on prices in the current climate, RICS say is the fact that new instructions are at an all time low, having fallen for 26 consecutive months. RICS said that this, along with continually rising unemployment and economic contraction to make the current minor upturn very fragile indeed.

In fact the underlying sentiment of the RICS housing market sentiment was as the headline said: outlook improving but housing market not out of woods yet. In other words, yes it's great that prices are rising now but with the economic outlook still so negative there is likely to be a second dip.

Commenting, RICS senior economist Brigid O’Leary said:

"There has been a clear change in the housing market over the past few months and, as a result, it is unlikely that we will now see the kind of house price falls widely predicted at the start of the year. Instead, the return of buyer demand and the limited availability of housing on the market could be enough to support prices so it wouldn’t be surprising to actually see prices increase further from here in the short term. That would be consistent with more positive expectations that have been reported in recent RICS Housing Market Surveys.

"However, the outlook for 2010 is fairly uncertain and there is a real risk that prices may slip back again. Affordability is still stretched and mortgage finance, while improving, is fairly hard to come by. The positive news we have seen has been a recovery from record lows and there are still many uncertainties in the economy. In particular, we are concerned about the mortgage finance environment and the impact of further increases in unemployment on house prices."

As we all know, there is currently a lot of positive news in the housing market, with prices rising on a monthly basis for some months now according to some indices, by 2% since April according to the Halifax and Nationwide, and all indices including that of the government showing the rate of decline having slowed massively.

But as we all also know, this current reversal of the downward trend has not been caused by a massive upsurge in activity like you would expect if the market had bottomed, but is in fact based on a marginal increase in activity, which has acted in conjunction with a massive supply short-fall to put upward pressure on prices.

The trouble with that is, if supply increases faster than demand, the upward pressure on prices will evaporate and we will likely be in for further sharp declines as the actors putting downward pressure on prices, like the restricted mortgage market and soaring unemployment, are able to take their full effect.

Such a scenario would seem likely; as the positive news could well make the thousands of people holding their property off the market think that now is the time to go for the sell. With that threat seemingly hanging over us guillotine-like, it is easy to focus so completely on it to become blinded to any other possible outcome.

But is the positive news likely to make the holders sell now? When you think about it calmly the answer is no, not really; these people don't want to sell because of the losses they face on their property, the 2% increase barely bites into the 20% loss we have seen so far.

On the other hand: who wants to buy a house if it is going to lose even 10% of its value within a year, let alone the 40% falls some analysts were predicting a few months back? So it is surely equally possible that the currently positive news -- that has made even the likes of BOE guy say that the worst of the price falls are over -- would bring more buyers into play?

If the number of buyers was to increase greatly, faster than supply increases, which is possible if not likely, then this will increase the upward pressure on prices and accelerate the price rises and slow the rate of decline faster.

In this scenario, this continuation of price growth would indeed see supply levels start to increase, and this would be the beginnings of a sustained recovery in the housing market. The recovery started by shockingly low supply, well it's got to start somewhere.

Of course there are three very big problems, namely:

1. Unemployment is currently massive and still rising
2. Banks are still being very cautious about who they lend to (especially who they lend 125%LTV to)
3. Vendors still are not being realistic about their asking prices, according to Rightmove's latest index the average asking price of new additions to the site is 40% higher than the average Land Registry sale price. This is worsening the supply shortage

Sure, they are three problems, each capable of preventing my scenario from becoming a reality, not to mention the fact that with supply so short too many buyers may not be able to find a home suitable for them. The truth is no one can say with any certainty what is going to happen next. Time will tell.

I can't believe what I have just read: on the myfinances blog Sarah Routledge writes:

"Buyer interest is rising, and price falls finally appear to be slowing. But property experts are waiting for mortgage lenders to loosen their criteria and agree more loans before announcing the bottom of the market."

Before announcing the bottom of the market, what planet does she live on? She says it like the market won't have bottomed until it the bottom is announced by property experts. That is not how it works. The market bottoms, then it is announced. Let me explain:

Say the lenders loosened their criteria to 2006 levels tomorrow; it would still not cause the market to bottom. There are so many other factors to consider:

For a start the economic outlook, unemployment and job-fears for those in employment are also a major hindrance on transaction levels; people won't be looking for mortgages in sufficient numbers to bottom the market until there is a wider economic recovery.

Secondly, many vendors are still unrealistic, or unwilling to sell for such a massive price drop; they are turning to house swapping sites to avoid the reality of a major price drop in order to sell. Prices will fall until homes become more affordable for first time buyers, and unrealistic vendors will continue to prolong that fall.

When these problems have been addressed the UK housing market will not need any announcement to bottom, it will just happen. Many positive events will converge, and we will see transaction levels increase very quickly; the market will have bottomed.

I read an article on Write About Property yesterday, which showed how past house price corrections have come at a time when first time buyers had been priced out of the market, and lasted until first time buyers could comfortably afford to buy houses again. The figure the article mentioned was a further 15%, which would bring average mortgage repayments down to about half the average salary of a first time buyer.

The article was based on a fairly loose prediction of what the current nationwide affordability index (the index of average mortgage repayments as a percentage of average first time buyer salaries) would stand at, because the Q1 2009 figures have not yet been released.

But if we apply the same methods to the House Price vs Earnings ratio (HPER), that is to track how the rise and falls of the last crash measured on the HPER ratio, which does have up to date figures, it paints an even worse picture.

The last house price correction began when, and in my opinion (and Write About Property's) began because gross house prices were pricing first time buyers out of the market; in Q4 1989 when the average gross house price was 3.7 times the average salary of first time buyers.

Major price falls ended in Q3 1993 when the average house price had come down to 2.3 times the average first time buyer's salary. Prices then bounced around the bottom until Q2 1996.

The house prices started growing again, and the HPER index reached had reached 2.5x when there was a growth slowdown which kept it below 2.7 until Q3 1999 when growth began to accelerate. From then on (barring a couple of minor growth slowdowns) the HPER index grew by at least .1x almost every quarter. By Q4 2007 the average gross price of a house was 5.4 times the salary of average first time buyers, and shock horror, growth began to slow before spiralling into the plummet we are still dealing with.

Irrelevant of why prices were allowed to grow to such ridiculous levels, I believe it was because of the investment boom, but whatever the reason if the last crash is an indicator for this one, which I believe it is, house prices will fall until they are no more than 2.3 times an average first time buyers salary.

According to Nationwide the average house price has fallen by approximately 15% between Q4 2007 and Q1 2009. The HPER index has come down to 4.1x. Going by that, if a 15% drop takes only one multiplication off the HPER index, then we need another 30% drop.

I don't actually believe prices will drop another 30%, because the HPER index fails to factor couples buying together, interest rates and many other factors, but between the Write About Property article, and this one, I think there is room for us all to be sceptical about the next green shoots report -- until houses are more affordable to average first time buyers anyway.

Technorati Profile