Stagnant housing market could deteriorate

Gradual falls in house prices may be a taste of much worse to come.

Amid all the talk about rising prices recently, the stagnant UK housing market is often overlooked.

Recent economic figures point to a market that is depressed, if not exactly in freefall. Data from Nationwide last month showed that house prices were unchanged from May, but down by 1.1% from the levels they sat at a year ago. The Royal Institution of Chartered Surveyors (RICS) said its seasonally adjusted house price balance edged up to -27 in June from -28 in May, showing that more surveyors reported falling house prices than rising prices.

But judging by a recent report from Capital Economics, “stagnant” may not be quite the right word to describe the housing market.

“We think that house prices will fall by 5% this year and by 7% in 2012,” the report says.

“Even then, housing would remain overvalued, so we have pencilled in a further 5% decline in 2013.”

Worries over the state of the broader economy are behind Capital’s gloomy prognosis. Consumer spending has further to fall and significant public sector job losses are yet to come, it notes. “Deflated by the retail prices index, real pay may well fall back to the levels of 2001,” it says.

Capital notes that it is regions most exposed to public sector job losses that have been experiencing the hardest falls, a trend that was identified in the most recent RICS survey. It noted that London continues to be the only part of the country where surveyors, on balance, are reporting rising house prices. With the London effect stripped out, the headline price balance was much weaker at -35.

Yet, despite Capital’s prediction that more job losses are due in the public sector, it thinks that London and the South, which are not so dependent on state-provided jobs, could be in for the biggest housing shock.

“Valuations suggest that London and the South have the furthest to fall overall,” it said.

“So by 2013, these regions may be seeing the largest downward movements in house prices.”

That said, Capital’s predictions could be a worst-case scenario. The coalition has been keen seize on the positives in employment data, which most recently showed a decline in youth joblessness and a slight fall in the unemployment rate, even if dole claims increased. Inflation, seen by Capital as heading upward and leaving people with less money to spare for housing, registered a slight fall in June.

Nevertheless, Capital’s gloom on house prices is to some extent echoed by other analysts.

“The market is … likely to continue to face significant headwinds which are expected to constrain housing demand,” said Halifax’s housing economist Martin Ellis, responding to its latest figures. “Low earnings growth, higher taxes and relatively high inflation are all continuing to put pressure on household finances."