UK house prices may fall as govt cuts sap confidence

Shortage of mortgage financing also expected to curtail demand

(EDINBURGH) UK house prices probably will fall the rest of the year as government spending cuts hurt consumer confidence and homeowners try to repay debt, according to economists and property brokers.

'Things aren't looking too great for the next few months,' said Fionnuala Earley, senior economist at Royal Bank of Scotland Group plc, which predicts that house prices will fall one per cent for the whole year.

'We're seeing increases in supply, consumer confidence weakening, and we are going to see real squeezes on disposable spending.'

The government's plan to reduce the UK deficit by slashing public sector jobs and raising taxes may wipe out gains in property values from the first half of the year, said Lucian Cook, research director at Savills plc in London. A shortage of mortgage financing will also curtail demand for homes, he said.

UK house values rose 3 per cent in the first half, according to Nationwide Building Society, the UK's largest customer-owned lender. Lloyds Banking Group plc's Halifax mortgage unit, Britain's biggest provider of home loans, estimates that they fell 1.6 per cent.

'Prices have outstripped expectations,' said Philip Shaw, chief economist at Investec Securities in London. 'There doesn't appear to be much momentum in starting this half of the year.'

Values slumped 23 per cent from the peak of the boom in September 2007 to the trough in April of last year after losses on US sub-prime mortgages led global credit markets to seize up, according to Halifax. They are currently at the level they were five years ago.

Now, mortgages are more expensive and harder to obtain for borrowers who can't afford a down payment of at least 25 per cent.

When the market was at its peak, banks were providing loans as large as five times a borrower's salary. That helped lift the average house price to a record 6.2 times earnings, compared with the long-term average of 3.7 times, according to Capital Economics Ltd. That ratio has since fallen to 5.2.

At the height of the UK's previous housing boom that ended in 1989, the ratio was only 4.7. Values slumped 13 per cent during the next four years. They didn't return to pre-crash levels until January 1998, almost nine years later, even before adjusting for inflation.

'Prices are still overpriced relative to incomes,' said Paul Diggle, a housing economist at London-based Capital Economics. 'We think they will decline 5 per cent this year as a whole and our forecast is for falls in the next couple of years.'

Foreclosure rates have risen more slowly than projections by the Council of Mortgage Lenders, as the Bank of England kept its benchmark interest rate at a record low of 0.5 per cent since March 2009. That has allowed homeowners to keep paying off their mortgages and helped limit repossessions.

Britons have been paying down debt on concern about job losses and government spending cuts. Consumer debt fell in May for a third straight month to its lowest level in six months, according to the Bank of England. Unsecured borrowing is at its lowest level since September 2007.

Claimants for jobless benefits in the UK almost doubled since March 2008 to 1.48 million people in May, which was the lowest amount in 14 months. They may climb 12 per cent more by the end of 2010 to 1.66 million people, according to the average of 38 forecasts compiled by the UK Treasury. That's still 260,000 fewer than the same forecasters were predicting in November.

Even so, Mr Shaw said last month that the housing market recovery in the first half may falter because mortgage approvals remain at 45 per cent of their long-term average.

There were 25 per cent fewer house sales in the first five months of 2010 than in the previous five, according to Savills, the UK's largest publicly traded real estate broker.

'Undoubtedly, prices will fall in the second half,' said Savills's Mr Cook. 'There is more stock coming to the market than people looking to buy.'

At best, Savills expects prices to end the year unchanged from 2009. - Bloomberg

Source: Business Times, 15 Jul 2010