1st May 2008
“April was another difficult month for the housing market. Falling levels of market activity meant that prices fell by 1.1% during the month and ended up 1% lower than this time last year. April’s fall in prices continues the trend of the last six months and reflects the weakening sentiment in the market brought about by poor affordability and tighter financial market conditions. This is the first year-on-year fall in prices since March 1996 and brings the price of a typical house to £178,555, £1,759 lower than at this time last year.
“The latest fall in house prices follows from the steep decline in house purchase transactions over the last half year. As a result of falling demand from first-time buyers, higher mortgage rates and tighter lending criteria, the number of mortgages approved for house purchases has fallen to record lows. The fall in transactions has pushed up the stock of unsold property on the market and improved the bargaining power of buyers, thus pushing down on prices.
“Although retail spending has so far been remarkably resilient as the housing market has faltered, lower house prices are likely to weigh down on the consumer over time. In recent years, rising house prices appear to have boosted overall consumer sentiment and made housing equity available for consumer spending. With house prices no longer rising, consumers are likely to become more cautious in their spending habits, contributing to a weakening of the overall economy. As the economy slows, inflationary pressures should moderate over time and allow the Bank of England to make additional interest rate cuts. However, the risk that the current strength of oil and food prices could feed into wages means that the MPC will probably prefer to cut rates at a more gradual pace than homeowners might prefer.
“In addition to April’s rate cut, the Bank of England announced measures to restore liquidity to the wholesale financial markets by offering an exchange of mortgage backed securities for government bonds. The scheme appears well thought out and should help to stabilise the markets which have seen significant volatility in recent weeks. However, the scheme is unlikely to mean that house prices and mortgage lending will return to levels seen at this time last year. Weakening housing market sentiment and demand, unrelated to the financial market turmoil, will mean that we should expect slower market conditions. However, the Bank’s measures should help to restore a more orderly transition and ultimately bring about a more stable market.
“One of the effects of financial market difficulties has been that cuts in the Bank Rate have not been reflected in wholesale money market rates which, along with the need for lenders to manage the volume of demand, has prevented like for like cuts in the cost of new mortgage products. However, it is easy to forget that the majority of borrowers are not taking out loans today. Indeed most mortgage borrowers have either not been affected by recent market events or have directly benefited from cuts in the Bank Rate."