Largest fall in UK house prices for 12 years

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Day by day we see an accumulation of evidence that the British housing market is well and truly into a significant slowdown. A lead headline in the Financial Times warns that fears over a renewed credit squeeze will give another jolt to the supply of mortgage finance available for home-buyers. and the Independent carried a front page headline asking “is the roof falling in on the UK housing market?”Many banks are struggling to find the funds needed to lend out to new mortgage-borrowers and interest rates in the crucial inter-bank market are heading higher once more. The Nationwide Building Society has revealed figures showing the steepest monthly fall in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />UK house prices for over twelve years. House prices fell on average by 0.8% in November bringing the annual rate of house price inflation to below 7%.

Similarly weak data came from the house price figures published by the Land Registry and the media focused here on signs that house prices are falling in London, a market where – thus far – the downturn in expectations and prices has been offset by strong overseas speculative demand for property. On their measure, UK house price inflation is running at 8%.

So price inflation remains positive for the moment, but what matters more is the direction in which the market is heading. One doesn’t have to be particularly bearish to predict that house prices could actually dip in nominal terms at some point in the next 12 months. And real house price inflation is likely to be very low in the short term. The chart I quite like to look at regularly is the house price expectations data from the Royal Institute of Chartered Surveyors. 2007 has seen a marked downturn in sentiment – it might take more than the odd base rate cut from the MPC to turn expectations around. If the major lenders cannot find the cash (liquidity) to lend out, demand for new mortgages will simply seep away and prices will fall further than we are expecting.

Further reading

UK property market turning down (BBC) David Smith’s Economics Blog Independent - “Is the roof falling in on the UK housing market?”