INTRODUCTION:
Take a look at the data and its boom time in the property market. Nationwide says prices are rising at 8.6% per year and we may hit double-digit price rises in February. But property information specialist Hometrack says prices are actually only rising in 7%.
Meanwhile, the Royal Institution of Chartered Surveyors said number of new buyer enquiries fell for the first time in 14 months in January. It blamed this on the cold snap, but interestingly the gap in the change in supply and demand slammed shut. In January, 20% more agents reported a fall in new buyer enquiries than a rise, while 5% more members reported a fall in new instructions than rise.
But does the argument that demand is outstripping supply withstand scrutiny anyway? There is a clear difference in the quality of activity for each measurement, with the former measured by interested buyers and the latter measured by people actually putting their home on the market.
WHY IS THERE SUCH DEVIATION IN DATA?
No-one uses the same data:
The problem with the majority of house price indices is that they do not provide data on the real price paid for houses in a proper way. For example, the most widely recognised indices, Halifax and Nationwide, use mortgage offer prices, which may differ from the price paid.
Rightmove and Hometrack are based on asking prices. While reports from the Royal Institution of Chartered Surveyors (Rics) are based on surveyor outlook and the Department of Communities and Local Government (CLG) works on mortgage completion prices.
The latter is still slightly off the mark, as it does not include the cash actually paid for a house: for instance, someone may combine some other debts into their mortgage.
Only the Land Registry (LR) and the Financial Times House Price Index (FTHPI), which is based on LR data, use transacted house prices data that include cash sales.
All are based on samples :
The common of the indices in the UK are published at the end of every month or shortly after. As a result, they are not based on a full-month's value of property transactions but a sample of that data.
For example, based on 2007 data, the CLG index is made-up of 50% of transactions made in the previous month, LR on 36%, Halifax 15%, Nationwide an estimated 7% and Rightmove 40%. The number of transactions has fallen since 2007, lowering the samples used across the board.This raises questions about the correctness of indices' predictions given the fact they are working on only a small sample of data.
The one exception is the FTHPI, which is based on 100% of LR transactions. (Read the full report on how it is compiled here.)
No-one knows what is going on:
Out of a half-a-dozen mortgage brokers we called for an opinion, only one of them could provide us with their preferred directory and a rationale for why this is so difference. The others couldn't highlight any significant differences between the index.
Victor John, from Romano broker Atom in West Sussex, said: 'I prefer the LR figures because they are based on cash sales, but by the time you get them, they are several months out of date.'
They are few of use long-term:
The authors of the Acidimetric report decorated all indices perform similarly over a long time when house prices are stable. We run into problem when using the indices to study house price movements over short, hot-tempered periods, such as the present.
STRUCTURE OF A HOUSE PRICE CRASH: HOW IT HAPPEN:
House prices had a game of two halves in 2009. The property market dramatic a remarkable comeback to rival Liverpool's famous European Cup return from 3-0 in Istanbul. This saw annual price changes swing back from a 17.6% fall in February to a 5.9% rise in December, on the Nationwide index.
Halifax show a similar rise from the dead, with prices fluctuation from a 17.7% fall in April to a 1.1% rise in 2009, on the information quarter-to-quarter measure. A plain December 2009 to 2008 comparison of the Halifax figures gives a 5.6% rise.
The brains behind the main survey appear attractive much agreed that a lack of supply has been a major market driver in 2009: would-be sellers are holding back on the hope that the market will recover and give them a selling price quicker to the valuation of 2007. Nationwide currently has prices goes down at May 2006 levels.
The party finally came to a sticky end for UK property prices in 2008. After a decade long boom, the market peaked in late summer / autumn 2007, and then prices tumbled as banks beat a hasty retreat from easy lending.
House price falls accelerated through 2008 and property market activity hit record lows in late 2008 and early 2009. Since then activity has improved and stabilised, but although a shortage of property means some areas look floating, in reality transactions are running at almost half of what is considered normal.
The property market's performance in 2008 was bad than almost all of the forecaster predictions for a year.
The major reports, the gloomiest picture was painted by the Halifax. Its index showed the average property losing a better fraction of its value in just 12 months than during the whole peak to trough period of the 1990s crash.
In December 2007, the Halifax index said the average home was worth £197,074, a year later this had fallen to £159,896 ' a drop of 18.9%. At the peak before the 1990s crash, Halifax's figures show the average home was worth £70,247, in May 1989. Six years later, property prices bottomed out, in July 1995, at £60,965. This was a peak to trough loss of 13.2%.
Due to the way it compiles its data, by compare a three month average with the same period a year previous, Halifax's administrator figure show prices falling 16.2% in 2008. However, this still represented a record drop ' the previous most rapid annual turn down being -8.3% in December 1992.
Land Registry's report showed property prices falling by 13.5% over the year, with the average home in England & Wales worth £159,956 ' a similar value to October 2007. Even in the evidently robust London market, the average home lost 13.9%, or £45,585, to end 2008 worth £327,071 ' a similar value to November/December 2006.
The smallest drop registered by a main house price index for 2008 was Hometrack's (8.7%), while the FT Academetrics study, which claims to improve on other study method, said prices cut down 10.4% over the year.
HOW THE PROPERTY MARKET WAS HAMMER:
While property price statistics for 2008 and early 2009 paint a reasonably miserable image, they do not fully reflect the damage so quickly.
In a little over a year, a booming property market became desolate, with the Royal Institution of Chartered Surveyors reporting its agents selling less than one property per week of the year.
A perfect storm hit the UK property market in 2008.With property prices having risen by 200% in the ten years to December 2007. According to Land Registry, property was in a bubble.
Many economists had predicted that this bubble was ready to bursting, but after showing signs of a slowdown in 2005, the market sped up again and the average price pointed between August 2007 (Halifax: £219,612) and January 2008 (Land Registry: £194,784).
The pin that burst the bubble was the credit crunch. The sub-prime crisis that had been brewing in the United States erupted in the summer of 2007, and as the year continued, the residential mortgage-backed securities market that had driven huge growth in credit for home loans basically cease to exist.
These allowed lenders to sell packaged residential mortgages to a special purpose vehicle, which then issued debt to investors, lure by strong returns from a supposedly liquid and low risk investment.
According to the interim report by Sir James Crosby, commissioned by the Treasury, between 2000 and 2007, the total amount outstanding of UK residential mortgage backed securities and covers bonds rose from £13bn to £257bn. The report said that by 2006 mortgage-backed security funding accounted for two-thirds of new net mortgage lending in the UK.
In July 2007 this market came to an 'abrupt halt', according to Crosby. This brought about the collapse of Northern Rock in the UK, problems for banks such as Bradford & Bingley that had fuelled the buy-to-let boom and major issues for all mortgage players. In February 2008, Northern Rock was nationalised and American bank Bear Stearns, which had specialised in the fancy finance that fuelled the mortgage boom, collapsed. It was the final sign that the party was over.
Banks fearful of huge losses began to dramatically cut back on mortgage lending and a vicious circle began. The more banks cut back on lending and raised deposits, the fewer homebuyers could secure finance, the more property prices fell and banks became more fearful and cut back further on lending.
THE MORTGAGE CRUNCH AND PROPERTY PRICES:
Mortgages are the key to the property market. The vast majority of buyers cannot purchase a property without a home loan and the price, availability and restrictions forced on these have the biggest impact on their ability to buy a home.
The dramatic slump in property prices in 2008 and before 2009 came as lenders turn off the mortgage taps. Lenders suffer a lack of funding, with the mortgage back up securities market that accounted for two thirds of new lending suddenly frizzed. Meanwhile, banks were also hit by a crisis of confidence, as they looked over the Atlantic and saw the devastation wreaked in America heading for the UK.
Mortgage rates going up, deposits were hiked and reports abounded of lenders pulling mortgages at the eleventh hour. Mortgages for home purchases dived by 49% in 2008, to just 516,000, according to the Council of Mortgage Lenders. This was the smallest number since 1974 and represented a third less than the 723,000 approved in 1991 ' the lowest level of the 1990s slump.
The Bank of England's monthly figures have also shown mortgage activity slowdown. The number of mortgages for homebuyers hit a record low of 27,000 in November 2008, rising to around 31,000 to 32,000 in December and January 2009.
In September 2007, just before the downward spiral began Bank of England figures showed mortgage approvals for homebuyers of 102,000 ' significant at that time as this was the lowest level for two years. The level of mortgage activity for home purchases in the first half of 2009, was about 60% below that figure and economists say approvals need to be at least 70,000 to 80,000 per month for prices to stabilise.
CONFIDENCE, PROPERTY MARKET AND PROPERTY PRICES:
A crucial driver of property prices, as with that of any asset, is confidence. The public's confidence in property, shares and banks are providing difficult criteria to mortgage. Compounding the problem of a lack of confidence in this economic situation is the uncertainty unsecure jobs as the recession . Redundancies and cut backs have led to a record rise in unemployment, with more people out of work than any time in the last 15 years.
If the property market manages to stage a recovery in the next 12 months, it will be against all odds, given the severe recessionary backdrop and slump in confidence. Bargain hunters may be searching for a first home, a bigger property or an investment, but the number of people actively willing to commit to buying will remain depleted until the economy improves.
INFLATION AND PAYING OFF YOUR HOME:
One of the effects of the rapid inflation in property prices since the early 1980s is that it paid off a generation's mortgages.
Those who bought a home in the 1980s to early 1990s, and then held on through double-digit interest rates and the 1990s crash, have emerged with properties that have risen to be worth five to ten times their mortgage.
The average UK property cost £30,890 in 1983, according to Halifax, and £199,500 in September 2007 ' an increase of 542%. Even allowing for the current slump that property was worth £160,327 in February 2009, an increase of 419%. For a similar effect to be delivered to a modern day homebuyer, the cost of the average property would need to stand at £832,097 in 2035.
In 1983 the average wage according to the Office of National Statistics was £7,700, today the most comparable measure stands at £24,900, an increase of 223%. If both property and salary inflation are sustained at the same long-term rate, the average wage by 2031 will be £80,500 and the home will cost 10.3 times more. This compares to the average home costing four times the average wage in 1983 and 8.5 times the average wage (£23,300) at the peak of the Halifax index in August 2007.
FUTURE PREDICTION:
House prices will rise more than 6% during 2010 and be around 20% higher by the end of 2013, according to a leading economic forecaster.
The Centre for Economics and Business Research also said it expected the UK bank rate to remain at 0.5% until 2011. The CEBR has revised up its housing forecasts thanks to an improvement in availability of mortgages and more loan approvals. It also believes that interest rates will stay at 0.5% until at least mid-2011.
Though it thinks rising unemployment and cuts in public sector spending will keep the lid on the market in 2011, it expects an overall shortage of homes will push prices up further in the following years taking the average price of a home from nearly £167,000 to £210,000 within three years. The forecast of a 6% rise for 2010 is an upward revision from '2% to 4%' made just over a month ago.
Benjamin Williamson, one of the report's authors, said: 'The fact that house prices have already risen by almost 10% since the bottom of the cycle has surprised most commentators. 'However, with the rate of mortgage lending more than doubling over this period of time, a shortage of new properties on the market, low interest rates and unemployment not rising nearly as fast as expected, it is easy to see how prices have moved so quickly.
This combination of factors will continue to push prices up during 2010, albeit at a more modest rate than we have seen over the last six months.' However, Hometrack's monthly housing survey showed a rise of just 0.1% in January for homes in England and Wales, contrasting with Nationwide's survey last week, which showed house prices across the whole UK jumped by 1.2% in January.
The Hometrack study, based on 6,000 questionnaires completed by estate agents, was the only to register a fall in house prices in 2009, of 1.9%. The research company expects prices to fall again in 2010, by 1%. It also warns that the property market recovery has been 'over-stated'.
The Bank of England also published figures today showing the first fall in mortgage approvals for purchase falling for the first time in a year. The number was 59,023 in December down from 60,045 in November. Ernst & Young's ITEM Club survey also issued a warning today suggesting that the 3% jump in commercial property prices seen in December - the highest monthly rise in 23 years - is not sustainable.
