House Price Update to 05/06/2009

Current UK House Prices Situation: Fairly stable with regional variations

UK House Prices Forecast: Further falls required to conform to long-term trends

House Price Indices Report Growth but Urge Caution

Three major house price indices reported some growth in average house prices in May. However, all three of them urged caution and stressed that even in downturns prices can both rise and fall.

· Nationwide: Average house price up 1.2% in May, bringing annual average change to -11.3%

· Halifax: Average house price up 2.6% in May, bringing annual average change to -16.3%

· Rightmove: Average asking price up 2.4% in May, bringing annual average change to -6.2%

Surely This Is Good News?

Not really - for two reasons. Based on long-term trends, house prices are unlikely to rise significantly for several more years and may even have further to fall.

This was emphasised by the Halifax, which pointed out that the house price to earnings ratio is currently 4.3 - above its long-term average of 4.0, although below its July 2007 peak of 5.84.

Tighter mortgage lending standards mean that this ratio will have to fall below its long-term average before it can start to rise again.

The only possible conclusion to draw from this is that prices have further to fall or that they will stagnate for several years until earnings have risen.

This is reinforced by Nationwide's Martin Gahbauer, who comments, "During the downturn of the early 1990s, there were many months during which prices rose, only to fall back down again in subsequent periods."

The second problem is what Rightmove's Miles Shipside refers to as equity immobility. This term describes people who don't have enough equity in their home to be able to get a new mortgage under current lending conditions and so cannot move.

Shipside attributes much of the rise in asking prices to people who are trying to increase the amount of equity in their property by selling it at a higher price. This approach, of course, is unlikely to succeed, as buyers will simply not accept rising prices. Shipside comments that deals are "being done at 25% below the peak of the 2007 boom".

Read about UK House Price indexes / key statistics that track the ups and downs of house prices

Read our take on the Credit Crisis the effect on UK House Prices and Mortgages. A Special Report

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