Is There Still Hope For House Prices?

As property prices slide, should we fear a return to the dark days of the 1990s -- or could we still be saved from house price hell? Laura Starkey investigates.

With the amount of scary property statistics being quoted everywhere just lately, you could be forgiven for thinking that (in the words of Dad's Army's Private Fraser) we're all doomed.

Stories warning of a 1990s-style housing crash have become almost permanent fixtures in the media this year. And, given our national obsession with house prices, the mere whisper of a crisis is enough to send British blood pressure through the roof.

Today, the latest report from RICS confirms that 95.1% of surveyors saw house price falls during April -- a new blow for anyone trying to stay sanguine about the situation.

So is there any reason to be hopeful for the future of the housing market? Or are we destined to see prices plummet, repossessions rise and misery abound in 2008?

Reasons To Be Cheerful: 1, 2, 3

Believe it or not, we Brits do have some things going for us.

At last week's Building Societies Association annual conference, Nationwide Building Society's Chief Economist, Fionnuala Earley, gave a speech outlining her view of the present situation.

Like several other experts, she predicts just single-figure percentage falls in property prices this year.

During her presentation, Earley explained several reasons why she believes current housing troubles may not develop into a full-scale catastrophe.

1. Our Economy's In Better Shape

While rising food and fuel prices are now putting the squeeze on many of us, the economy is still stronger than it was at the time of the last crash.

Growth is predicted to slow this year, but -- officially at least -- the UK is not headed into recession.

UK unemployment is also low, in sharp contrast to the floundering USA where it stood at a whopping 5% last month. With more people in work, it's less likely that there will be a high volume of forced home sales due to arrears and repossessions.

Crucially, interest rates are also under far stricter control than they were during the 90s. Currently set at 5%, the base rate is far more affordable than the sky-high rates seen during the last recession.

However, today's report of a rise in inflation could see any hopes of further rate cuts dashed.

2. We've Speculated Less (And Borrowed Better)

Another factor in our favour is that there have been fewer homes built during the British housing boom than were constructed in the US.

Over there, construction companies rapidly erected millions of new homes -- many of which now stand empty.

Here, stringent planning rules and a lack of available space have prevented this excess of housing from being built, so that demand for homes in Britain is not outstripped by supply.

Moreover, while many people have strong opinions on 100% and 125% mortgages, lending has (believe it or not) been more cautious here than it was across the pond.

In the US, variable rate mortgages with introductory discounts were offered to sub-prime borrowers, who were later hit with `punitive' price hikes. This led to vast numbers of homeowners defaulting on their loans, and has caused a tidal wave of repossessions.

However, thanks to less reckless lending practices, the UK should avoid this fate, according to Earley.

3. The Future's Bright

Well, at the very least, it's full of potential first-time buyers.

According to statistics from the Government Actuary's Department, the number of 25-34 year olds in Britain looks set to rise over the next four years. Consequently, there should be more people wanting to purchase their first property.

At the same time, the way we live in Britain is changing. With more people choosing to live alone or in couples, many homes have fewer people in them -- and this also heightens demand for housing.

Overall, the long-term `fundamental' prospects for the market still look strong.

A Crash Of Confidence

In spite of Earley's arguments, I'm still cautious about the immediate future of house prices in Britain.

Economists have moved from predicting a `flattening out' of prices this year to accepting that the only thing left to dispute is how far they will fall.

One thing Earley's speech did highlight, however, is that public sentiment has a significant impact on property prices.

As we lose confidence in the market, our fears can become self-fulfilling. Arguably, the effects of our flailing faith in house prices are already being felt.

At times like these, I think there's little to be done but hope for the best and prepare for the worst. If you're a homeowner, key ways to help minimise the effects of a potential crash are to plan ahead, get the best mortgage deal you can and try to reign in your spending.

But while we wait to see what 2008 holds for house prices, it is worth remembering that panicking about property prices is unlikely to do homeowners -- or the market -- much good.

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