What Happens along the way when prices fall

In the UK the house prices is closely linked to economic performance. Studies (OECD) have shown that between 1971-2002 that a 1% change in values of British house stock led to a 0.7% change in consumer spending.

In other parts of the world a strong economy creates higher house prices via rising and falling unemployment. But in Britain higher house prices themselves make the economy look even stronger.British citizens felt very confident in the housing wealth that they took equity out of their homes and spent it. Mortgage equity withdrawal was a key economic growth during the labour government years.
Rising house prices also fed the wealth effect, people tend to run up more credit card debt for the extra luxuries if the equity of their homes went up even if the debt was more than they could pay on an income alone.
This is why Britain has one of the highest debt level amongst its citizen in the west, many were caught in the housing bubble burst and are now suffering. This in turns reduces the consumer spending drastically as mortgage holders tend to make more payments towards the mortage when they start to fall in negative equity as prices keep crashing. Lesson to learn don’t leverage yourself with equity that you don’t have, otherwise you risk losing more than you put in!

House prices see highest jump since 2006

House prices see highest jump since 2006
By Norma Cohen

Published: May 29 2009 07:54 | Last updated: May 29 2009 20:11

UK house prices rose for the second time in three months, registering the largest one-month increase since late 2006, according to the Nationwide House Price Index.

House prices jumped 1.2 per cent from April – just the latest evidence that consumers and businesses are becoming more optimistic about the economic outlook.

But Martin Gahbauer, chief economist at Nationwide, warned that the latest indicator did not mean that house prices had bottomed out. “Although the short-term trend in house prices has clearly improved, it is still too early to say that the market is turning definitively,” Mr Gahbauer said.

EDITOR’S CHOICE
London sees return of gazumping – May-29Video: Chris Giles on continued uncertainty over house prices – May-29Evidence mounts to suggest worst is over – May-29In depth: UK house prices – Jan-09Video: Nationwide results not as bad as they sound, says Adam Jones – May-27Lombard: No shield for Nationwide – May-27He noted that during the housing downturn in the early 1990s, prices moved erratically, with increases in some months later wiped out by subsequent declines.

If the housing market stabilises, lenders might regain the confidence to offer first-time buyers mortgages of more than 75 per cent of a property’s purchase price. The reappearance of this group of buyers is considered key to sustaining the market, but the current 25 per cent downpayment is too high for many.

Mike Saunders, economist at Citi, said the nation’s housing market still faced considerable headwinds, not least of which was surging unemployment.

“Nevertheless, pretty well all housing guides have improved in recent months after previous extreme weakness. And, at least on the Nationwide Index, house prices have been more resilient than expected in recent months,” he said.

Overall, house prices still stand 11.3 per cent below their May 2008 level, an improvement on the 15 per cent year-on-year decline in April.

The three-month on three-month average move – an indicator that smooths out monthly fluctuations – showed a decline of 0.5 per cent between April and May. That is far smaller than the 3.0 per cent fall seen in the same measure between March and April.

Recent surveys from the Royal Institution of Chartered Surveyors have shown rising interest from buyers, although that has not translated into an equivalent level of sales.

Optimism that house prices may be stabilising has been fuelled by a slight pick-up in mortgage lending, although economists have warned that absolute demand remains too low to declare that the market has no further to fall.

Mr Gahbauer noted that the general improvement in house price trends was consistent with signs of stability in other economic indicators. However, the supply of housing was unusually constrained and that might account for some of the latest price movement.

The Rics key sales-to-stocks ratio – the ratio of sales to unsold inventory – has been declining, a trend that suggests the backlog may be abating.

But stock levels may be falling not because demand is soaking up inventory quickly, but because so few homeowners want to put their property on the market.

He said that anecdotal evidence suggested a rise in the number of “reluctant landlords” who chose to let their property rather than sell in depressed conditions. But this was leading to a surplus of rental properties, pushing down rents.

It was unlikely, however, that sellers would be able to hold out indefinitely – particularly as unemployment rose, as it was widely forecast to do.