Clik here to view.
Thinktank says inflation will undermine any price rises, with mortgage lending and building activity both down in March
House prices will fall in real terms for the next five years, a leading economic think tank warned on Thursday, as new signs emerged that the already moribund market weakened in March.
The Land Registry reported the biggest monthly drop in house prices in more than two years in March, and now the National Institute of Economic and Social Research (NIESR) has said inflationary pressures in the coming years would erode any rise in nominal house prices.
The prediction by the NIESR came as ratings agency Standard & Poor forecast a 5% fall in house prices during 2011, due to George Osborne's austerity budget deterring prospective buyers from taking the plunge. Data published yesterday by the Bank of England showed that the housing market weakened in March with mortgage lending falling 60%, while a Markit/CIPs survey reported that housebuilders experienced their first decline in activity of the year. Nationwide building society reported yesterday that house prices fell in April as well, by 0.2%, down 1.3% from a year earlier. The society predicted prices would now move sideways or "drift modestly lower" during the year.
But this is more optimistic than some economists, who believe that house prices are now likely to fall further. Forecasters at NIESR said: "We expect the housing market to remain weak over the coming three years.
"House prices have been overvalued for much of the past decade, but with current low borrowing costs they look about right. However, borrowing costs are likely to rise over the next five years as policy rates set by the Bank of England move from crisis levels near zero to normal levels of around 5%. These increases are likely to induce real house prices to fall by around 2% a year for the next five years."
S&P believes that homebuyers will be deterred by the government's spending cuts. The agency's chief economist for Europe, Jean-Michel Six, said: "We think prospective homebuyers may well hold off on acquisitions for a while, given governments' implementation of fiscal austerity plans – particularly in the UK, Spain and France.
"We anticipate that the UK housing market will drift sideways in the coming 18 months, with prices shedding about 5% this year and roughly flat in 2012."
Other economists are also analysing the impact of spending cuts. Paul Diggle, property economist at Capital Economics, said he expected falls in house prices "in the face of large public sector cuts".
The Land Registry showed a clear north-south divide that may widen. "Following a hefty 5.3% month-on-month fall in March, Yorkshire & Humberside joined the north-east in seeing prices fall below the previous trough around Easter 2009," Diggle said.
"Prices in Wales and the West Midlands are just 0.2% and 1.3% respectively above their previous lows. These regions are likely to be at the sharp-end of public sector spending cuts, meaning that, for now, they should continue to lead the rest of the country into the second leg of the house price correction," he added.
The latest dip in net lending, which takes account of loans that have been repaid, saw the total drop to £374m in March after reaching £950m in February and £1.7bn in January. Before the credit crunch, the highest figure reported by the Bank of England was £10.4bn in October 2006, although it has slipped into negative territory at times since then with repayments outweighing new loans.
Diggle said lending figures might have forced economists to predict a double digit fall in house prices – but the low interest rates were helping deter deeper falls. With Bank of England data also showing that lending to business was down again, Lord Oakeshott, the Liberal Democrat peer who resigned over the Project Merlin deal between the government and the banks, said: "These lending figures are gruesome evidence that our banks are choking off Britain's economic recovery.
"Project Merlin's a farce: the government must act now on the banks to stop small businesses and the house market seizing up."
The Bank's mortgage approvals data also showed the market remains far below the levels experts regard as "normal" – of about 100,000 a month. Approvals in March were at their highest levels since November, but still reached only 47,557.
"The big picture is of a pretty lifeless housing market, with low turnover and very little new money coming into it," said Ross Walker, an economist at Royal Bank of Scotland.
National Savings savaged
The mortgage market is a "long, long way" from returning to normality, the chairman of the Building Societies Association (BSA) said as he attacked the government for allowing the state-backed National Savings & Investments (NS&I) to re-enter the savings market.
David Webster, who is also chief executive of Hanley Economic Building Society, also called for the government to remutualise Northern Rock, which was nationalised in 2008 and is now looking for ways to leave state control.
The BSA admitted that net mortgage lending by mutuals contracted for the 27th consecutive month in March, as customers repaid £476m more than was lent in new mortgages. There was also an outflow of savings as £604m was withdrawn.
NS&I may have an impact on the savings side. Webster said: "We were disappointed to see that in the budget the Treasury announced that National Savings – backed by the taxpayer and able to design its own tax-free products – would be seeking to take £2bn net from the savings market during the current financial year. This is money that banks and building societies could otherwise have been lending to first-time buyers and other borrowers."
Even so, he was upbeat as he addressed the BSA's annual conference. "The disgrace in which our competitors are now held, many of whom owe their very existence to taxpayer subsidy because they were unable to stand on their own two feet, gives mutuals the opportunity of a lifetime to gain people's trust and to prove that they are relevant, indeed essential, to the age in which we live," he said.
"In the light of the position of our competitors, the resilience we are clearly demonstrating to the outside world and our fundamental business ethic, mutuals have a tremendous opportunity to emerge as even more successful businesses in the future," Webster added.