House Prices Look Fragile

UK house prices ticked up slightly in August, but the overall picture looks weak.

The housing boom is coming to an end. There's a good chance that prices will fall next year.

Don't believe me?

Well, let's look at the house-price data that's come out during the last few days. The Land Registry said yesterday that UK house prices only rose by 0.1% in July while Rightmove said that prices fell in London in August. What happens in London could spread elsewhere in time...

Then the Nationwide Building Society chipped in today. Admittedly, Nationwide's seasonally-adjusted number shows a 0.6% rise in UK house prices for August compared to a 0.1% rise in July. However, the non-adjusted figure shows a slight fall and annual house-price inflation has slowed from 9.9% to 9.6%.

Then there's Nationwide's sales-to-stock ratio. This looks at sales as a percentage of the total housing stock on the market at that time. It's tumbled to below 40% this year compared to a ten-year high of around 60% in 2002. Nationwide says this ratio lags house prices by five to seven months, so that's not a good sign.

What's more, Nationwide said today that there has been a 'collapse in new buyer enquiries.' Not good...

I also think the US 'subprime' credit crisis is far from over. We still don't know who is exposed to this problem and by how much. Further bad news on that front is bound to hit the stock market again and that could well hit London property prices. 

On top of that, I suspect the Bank of England will end up increasing the base rate again in the next few months, regardless of any stock-market falls. The Bank said today that M4, a broad measure of the total amount of money in the economy, rose 1% in July, pushing annual growth to 13%.

These days, it's pretty much the conventional wisdom that rising M4 will feed through to higher prices on the high street, and 13% growth is too high. The Bank's primary purpose is to keep inflation under control, so I think it will feel obliged to raise the base rate in order to achieve its objective.

And don't forget that a large number of borrowers will see their fixed-rate mortgage deals expire over the next year. That could inflict serious pain on some homeowners, especially if the economy slows down too.

We may also have a mini-subprime crisis here in the UK. Bloomberg reported today that lenders are tightening standards and raising rates for borrowers with less-than-perfect credit records. Investec has reportedly stopped offering any subprime loans.

That said, I don't expect any subprime problems here to be as serious as the US. That's because UK lenders have to keep a higher proportion of their loans on their balance sheets than in US -- something like 80% against 20%, according to breakingviews.

Another difference with the US is land availability. When times are good, it's easier for US builders to flood the market with new homes, so there will probably be a bigger glut of homes to dispose of across the Atlantic.

I also admit that pundits' predictions on house prices often prove to be wrong. Indeed my colleague, Neil Faulkner, is sceptical about the value of all such comments.

Meanwhile, fellow Fool, Cliff D'Arcy, has been arguing that house prices are overvalued for at least two years and the market is yet to agree with him.

But I'm confident that the boom is over. There are too many signs flashing amber at the very least...

More: House Prices Start To Fall In London  | Why I Don't Trust House Price Indices