George Hay and Edward Hadas
Uncertainty in the UK
breakingviews.com
How far will UK house prices fall? David Blanchflower, a member of the Bank of England’s monetary policy committee, has warned of a 30 per cent drop from now, unless rates are cut. That may sound alarmist – lender Halifax is calling for a more modest 10 per cent fall – but there’s a good argument for a 20 per cent fall.
Blanchflower’s estimate is supported by one standard housing valuation measure – the ratio of price to average earnings. The UK average house price of £178,555, according to Nationwide Building Society, is six times mean earnings. That’s way above the long-term average multiple of 3.7. To get there, UK house prices would have to fall 30 per cent, even counting in three years of 5 per cent growth in average earnings.
Some analysts think this measure is too crude, because lower interest rates allow the same payment to support a larger mortgage, and thus a higher house price. A more sophisticated yardstick is the ratio between monthly mortgage payments and take-home pay.
That ratio is currently 50 per cent, well over the long-term average of 37 per cent. With no change in interest rates, a return to the average would bring house prices down by 12 per cent, on top of the 4 per cent decline since November. Of course, that mortgage-to-pay ratio could stay high. But the credit crunch is making lenders much more cautious. Mortgage volumes are already down 45 per cent from last year.
Also, lower loan-to-value ratios will lead almost automatically to comparably lower housing values. Already, zero-deposit mortgages are scarce and the low starter rates only come with a 25 per cent down payment. Add a lower average loan-to-value ratio – a move from the current 92 per cent to a still cautious 83 per cent – to the lower mortgage-to-pay ratio and the fall in the average house price would be 20 per cent.
If anything, there could be a danger that prices will overshoot on the downside. Already, home repossessions are at a record level. A 20 per cent decline in the average price would leave 16 per cent of mortgage-holders - 1.9 million homes – with negative equity, according to Morgan Stanley. Too many forced sales in a thinning market could lead to even lower prices.
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