Property market faces paralysis

2011 will see the bulk of the property market in a state of paralysis, according to one property portal.

My annual mortgage statement arrived in the post last week, marking two years since I bought my maisonette.

It’s been a funny two years for the housing market. House prices have recovered somewhat from the crash levels of 2008, though that recovery now appears to have stalled. And it’s still as difficult as ever for first-time buyers – as I was – to access mortgage funding, and get onto the property ladder.

Indeed, one property portal has warned that 2011 will be a year of ‘paralysis’ for the property market.

The paralysed mass market

In its latest analysis of the housing market, property portal Rightmove highlighted that the UK now has a three-tier property market. At the top end you have the ‘elitist’ tier, those with large equity stakes and deposits who the lenders are falling over themselves to attract.

At the lower end of the market, where forced sales are becoming more frequent, ‘bargain-hunting, bottom-feeding investors’ (a delightful phrase) are taking advantage. What’s more, they are likely to see even more opportunities to buy cheap once interest rates start heading north.

However, it’s the middle-tier – the mass-market area of the property market – which is now facing paralysis. Rightmove argues the sellers are either unable or unwilling to drop their asking prices, instead preferring to play the waiting game and hold on until a buyer with the requisite cash turns up. For many, it’s proving quite the wait.

And as new sellers enter the market, they see similar properties and so demand similar asking prices, failing to realise why the homes already on the market are failing to sell.

So how accurate is the word paralysis when describing the bulk of the UK’s housing market? And why has it reached this stage?

Transaction levels

Let’s first look at transaction levels, which should give us a clear indication of how things are moving. Below is the most recent data from the Land Registry, which sadly lags behind the market, and so only covers up to November last year. However, it should give us an idea of what momentum (or lack of it) the property market is currently enjoying.

From these figures it’s clear that while the property market continued the improvement of late 2009 into the first half of 2010, once the leaves started turning brown it all started to stall. And given December and January were hit by the snow which, if you believe the Government and the nation’s retailers, brought the nation’s economy to a standstill, it’s hard to believe things got too much better. So why are transaction levels faltering?

Getting a mortgage

For the vast majority of us, the only way to buy a property is to get a mortgage – sadly, very few of us have £300,000 plus in cash sitting around in our bank accounts.

However, for quite a while now, the numbers of mortgage approvals have been pretty low. Using data from the Bank of England, I’ve put together the table below tracking the number of mortgages approved for house purchase over the last 18 months.

As you can see, there have been plenty of month-on-month falls in mortgage approvals over the past year and a half, with the number of mortgages approved for purchase in January this year down 7,680 from August 2009.

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It’s no wonder that as it gets harder to actually get hold of a mortgage, the number of property transactions will fall as well. So what are the prospects of this situation improving in the coming months?

A year of stagnation

The lenders themselves are not that confident that 2011 will see any improvement. The Council of Mortgage Lenders, the lender trade body, has predicted that property transaction and gross mortgage levels will both remain broadly the same in 2011 as they were last year.

There are a number of reasons for this conservative prediction. Firstly, there is the economy. With so many of us facing uncertain employment futures, it’s understandable that Brits are focusing first on reducing their current levels of debt and building up savings safety nets, rather than looking to buy a new home.

Then there is the issue of funding. From April, lenders are going to have to start repaying some of the funding they received from the Bank of England to help prop up their lending in the aftermath of the crunch. And if their money is going towards repaying those debts, it can’t be put towards lending to the likes of you and me.

That said, lenders are at least making the right noises. Northern Rock has returned to the 90% loan-to-value market, while there are increased options for many borrowers with small deposits.

House prices to fall 20%!

However, there are those that take an even more pessimistic view than the Council of Mortgage Lenders about the immediate prospects for the housing market.

Capital Economics, the nation’s gloomiest of economists, has suggested that house prices are currently 20% overpriced, and will fall by this amount over the next two to three years. The firm highlighted that over the past 40 years house prices have tended to sit at around 3.7 times earnings, though they are currently at around the 5 times earnings mark.

If they are right, it won’t just be the ‘bargain-hunting, bottom-feeding investors’ who can nab a bargain on a property.

More: The best new deals for spring | Northern Rock launches 90% mortgage | Banks don’t know their ISAs from their elbows!

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