House Prices Continue to Fall

The crisis in the housing market deepened today after mortgage lender Halifax reported a dramatic slump in prices and Bellway became the latest builder to issue a profits warning.

Halifax said the average price of a house in Britain fell 2.4% in May alone to £184,111. The slump left prices £12,525 lower than in the same month last year - an annual fall of 6.4% and the biggest drop since February 1993.

Bellway warned ‘there has been no sign of the normal spring selling surge’ in yet another grim warning to the City from the housebuilding sector.

The warning came as the Bank of England met to set interest rates for June. It looked likely to leave rates unchanged at 5% despite the slowdown in the housing market and the wider economy. The Bank, led by Governor Mervyn King, is concerned about the threat of rising inflation, which is heading towards 4%.

Halifax chief economist Martin Ellis said: “The decline in prices is caused by the difficulties created for potential house purchases by the rapid rise in house prices in the last few years, a squeeze on spending power and the reduction in credit availability. These factors have curbed housing demand.”

Bellway said: “The restricted mortgage supply, combined with a sapping of consumer confidence, is leading to further market weakness.”

Reservations have tumbled by 31% since February and Bellway now expects to sell 10%-15% fewer homes this year than the 7,638 it sold last time around. The company had previously forecast sales to fall between 5% and 10%.

The warning was the latest in a series led by Persimmon, Britain's biggest housebuilder, and shares in the sector have tumbled since early last year. UBS and JPMorgan this week warned the downturn would continue for sometime and suggested that many housebuilders were now pondering rights issues to raise funds.

Bellway shares have crashed from 1675p in April last year to a five-year low of 594p last night. They fell another 9½p to 584½p in early trading today. However, Yolande Barnes, the head of research at the Savills estate agency expects property prices to fall 8% this year and just 2% in 2009.

Jonathan Loynes, chief UK economist at research house Capital Economics argues that many people think the worst of the market outlook.

He says: “We’re a quarter of the way there already but the ratio of house prices to incomes is still higher now than in the past. For that ratio to get back to its long-term average you’d be looking for 40% and you’re assuming that it does not overshoot on the downside.”

But after a decade of booming prices, the housing bubble has been shattered by a change in sentiment as well as economics. Many analysts have warned that prices will continue falling even if they argue about how far.

Experts also believe that because less people would be willing to buy property in the current market, turnover is expected to be substantially down perhaps 40%.Loynes added. “If it doesn’t matter whether you buy now or in six months, I’d say wait.” But he and Barnes differ over whether to blame the weak demand or the limited supply of funds.

Savills’s Barnes says: “We do not see this as an affordability crisis.” In 1989, when prices last started falling, high mortgage costs left owners with no spare disposable income to pay more, she says. “This is much more like 1974: it’s all about the withdrawal of credit and mortgage rationing. That affects turnover and means deals cannot be done.”

Loynes concedes the credit crunch is hitting mortgage lenders but asks: “Does it matter that supply is being constrained? There is no demand anyway. However, if demand turned round quickly, the constraints on the supply side would bite.”