House Prices Fall By A Tenth

The latest survey from Nationwide shows house prices down 10.5% in the past year. But Cliff D'Arcy thinks the worst is yet to come....

Leading mortgage lender Nationwide BS released its latest house-price survey today. Unsurprisingly, its figures were accompanied by a hefty dollop of anxious spin-doctoring!

According to Nationwide, the average price of a UK home fell by 1.9% in August and 10.5% in the past twelve months. However, these figures are seasonally adjusted, and `fine tuning' of this kind is questionable when the housing market is tumbling at its fastest rate in almost two decades. Hence, I prefer to view the underlying data, as shown below:

Average house price, according to Nationwide BS

As you can see, the average UK property price has dropped from £183,898 a year ago to £164,654 today. This is a fall of £19,244, or just over a tenth (10.5%), matching Nationwide's year-on-year figure. However, ignoring any seasonal adjustment, prices fell by a hefty 2.8% between July and August. That's almost half as much again as the 1.9% drop highlighted by Nationwide...

More gloom ahead

Nevertheless, Nationwide warns that the UK housing market has recorded its biggest yearly fall since late 1990. However, although prices have dropped for ten months in a row, modest rises were recorded in September and October 2007. As it seems almost certain that prices will fall this September and October, Nationwide's headline figure is sure to worsen in the months ahead.

What's more, these are `nominal' falls which failed to take account of general inflation (the tendency of the price of goods and services to rise over time). Adding in the latest Retail Prices Index (RPI) measure of inflation, currently at 5%, we find `real' (inflation-adjusted) house prices have fallen by 15.4% over the past year.

The incredible vanishing £1,000,000,000,000

To put this 15.4% fall into context, it means that around £1 trillion of housing wealth --almost a sixth of the total -- has evaporated in just twelve months. Ouch!

Furthermore, house prices tend to be `sticky' on the way up and down. In other words, they tend to follow the established trend. Thus, although we may see some modest monthly rises, I would warn against being suckered by these `false dawns'. Barring government intervention, I see no reason why prices shouldn't continue to slip well into 2009 and even beyond.

Of course, the reason for this dramatic turnaround in the housing market can be summed up in two words: credit crunch. A steep drop in the availability of home loans has caused the number of housing sales to plunge by two-thirds. This has caused a surge in the number of properties on estate agents' books, with over a million homes up for sale. Hence, we are now in a buyers' market, with sellers forced to lower both their expectations and prices in order to secure a sale.

Then again, there is one piece of good news for hard-pressed homeowners. According to Fool partner Moneyfacts, interest rates on fixed-rate mortgages have started to fall, and are hardly higher than they were this time last year. However, arrangement fees have climbed steeply, so new home loans and remortgages remain dearer than they were a year ago.

How does this affect you?

As I often say, `averages invite comparisons', so the national picture may have little or no bearing on your personal situation. At their heart, housing markets are local, so the current picture may be better or worse in your area than it is at a national level. For example, house prices are holding up fairly well in Scotland (for now), but are plunging in Northern Ireland. Likewise, new-build properties and flats are faring worse than family homes.

For the record, as an ex-home owner who sold to rent three years ago, I stand to benefit from falling house prices. Likewise, three in ten households (30%) are inhabited by tenants, who will benefit from lower prices if they become owner-occupiers in future. Moreover, so will the majority of current homeowners, as I explained in House Prices, Burgers And Buffett.

Indeed, in a recent BBC News survey, the majority of respondents agreed that lower house prices would be a good thing all round. So, although falling prices might strike fear into the hearts of the UK's 11.8 million mortgage borrowers, future buyers should welcome them!

More: Find marvellous mortgages via The Fool | I Want A House Price Crash | Bad News For Homeowners And Lenders