Base Rate Slashed By 1.5%, But House Prices Dive

According to mortgage giant HBOS, house prices have dropped back to 2005 levels. But there will be more falls to come, despite a 1.5% cut to the base rate.

Leading mortgage lender Halifax released its latest House Price Index (HPI) this morning, which contained yet more bad news for homeowners.

Halifax revealed that the average house price fell 2.2% in October alone, and 14.9% -- more than a seventh-- over the past twelve months. The mortgage lender reckons that the average UK property now costs £168,176, which is £29,522 less than the £197,698 recorded in October 2007. Ouch!

Of course, as I often say, `averages invite comparisons', so your home may have gone down in value more or less than the average for the UK as a whole. At their heart, property markets are local, so your own situation will depend on the type of property you own, its location, local demand and so on.

Nevertheless, these are the steepest falls on record from Halifax, which has been monitoring house prices since 1983. In addition, prices have fallen for nine months in a row, as the following table shows:

There will be more falls to come

You'd have to be a hermit not to have noticed the weak conditions for the UK housing market. Rising household bills (especially for food and energy) have caused disposable incomes to fall. What's more, the banking crisis has led to a mortgage famine, causing a plunge in the number of property transactions.

However, tucked away in the Halifax HPI survey is a figure which gives great cause for concern. It is the house-price-to-earnings ratio (HPER), which shows how much a typical home costs versus the average household income. At its peak in July 2007, this ratio stood at 5.84. By August 2008, it had fallen by almost a sixth (15.8%) to 4.92.

Then again, the long-term average for the HPER is 4.0, which means that property prices would have to fall by almost a fifth (18.7%) to revert to this long-term mean. However, prices have a tendency to overshoot this mark during housing crashes, which suggests that they could have much further to fall.

Base rate cut by 1.5%, yet mortgage rates remain stubbornly high

Today, the Bank of England reacted aggressively to the UK's financial crisis, cutting its base rate by (an incredible, unprecedented) 1.5% to just 3%. However, it is unlikely that this cut will have much immediate impact on mortgage rates (other than trackers), because inter-bank lending rates remain high. Indeed, last month's 0.5% cut led fewer than half of all mortgage lenders to reduce their standard variable rates (SVR, the bog-standard rate paid by all borrowers who don't have a special-rate deal).

Alas, with unemployment climbing, a global recession on its way, a weak pound and expectations of further house-price falls, there's not much good news in the offing for British homeowners. I don't expect any quick recovery for the housing market, even after more rate cuts by the Bank of England. After years of living the good life on credit, we have to deal with a nasty housing hangover.

Finally, Halifax has started to clutch at straws in order to make housing sound like an attractive investment. During the boom years, it used to trumpet how much house prices had risen over one year. As the market weakened, this comparison moved out to two years, then three. Today, it claims that the average house price is now two-ninths (22%) higher than it was five years ago. Talk about desperation!

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