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Hopes For a Soft House Price Fall

Despite some bad signs for the property market, experts are still forecasting a soft landing and not a crash. Housing prices have started to fall, mortgage rates are drifting up despite a stable base rate at the moment, and consumer confidence has been hit by the Northern Rock crisis, but a crash can still be avoided.

Signs of a potential slowdown have been visible for the past few months, even before the sub-prime crisis and credit crunch came to the fore. In August asking prices for properties in England and Wales were already on the decline. Property website reported that asking prices fell by 3.1% in Yorkshire and Humberside in that period, and by 3.3% in the South East. In the South West the fall was 4.1% in asking prices. Greater London has seen great strides upward in the market this year, but even here, asking prices were down by 2.5%.

Commercial director at Rightmove, Miles Shipside, said that only 121,000 properties can to market in that period – the lowest figure since 2004. The drop in business will bring the market to a slowdown, but may not mean a significant fall in prices. However, a steep fall is still possible, but a period of stagnation for a year to 15 months is most likely.

Despite financial problems in the markets all the way down to households and individuals, there hasn’t yet been a rush of sellers looking to escape. In fact the opposite seems to happening, as people are adopting a ‘wait and see’ attitude. Hometrack also recorded falls in prices in Yorkshire, Northern England and the South West, but there were small increases everywhere else. Overall prices were on a flat line for August, despite regional variations, and this was down to affordability problems and buyer caution.

A crash can be avoided if this type of calm approach continues as that should avoid a crisis of confidence. It is still hoped that the Northern Rock problems will not spill over into the housing market directly. Unlike the panic withdrawal of savings by many people, it is to be hoped that they maintain a watching brief, and prices will drift down rather than fall with a bump.

There are still some underlying factors that support the housing market. The first is that the UK economy is still based on a firm footing, unlike the situation when house price last crashed in the 1990s. Economic fundamentals are good and employment is high. The UK’s gross domestic product grew by 8% from quarter one to quarter two in 2007, and national employment is still on the up.

The second factor is that there is still a shortage of housing – there are more potential buyers than houses available, so demand should be maintained. Although 180,000 homes are being built in the UK each year, the government says that 230,000 are needed. Although they have plans to increase the numbers being built, this is not happening yet. The year-on-year housing shortfall contributes 2.4% to the increase in house prices, compared with 1.1% in the whole of Europe. The shortfall should continue to buoy prices.

There are some problem areas: HIPs are slowing down the market, and many city centres have had too many flats built than are needed, leading to oversupply in those areas. Also, problems in the City may lead to a dent in the London property market.

The balloon may yet go pop.

Tom Smith
29th September 2007

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