House prices will fall again!

Find out why the housing market hasn't bottomed out just yet!

Economists espouse many different theories on the housing market crash, credit crunch and wider recession. And, while probability dictates that some of them will call the crash and the recovery correctly, there will be many more experts who get their predictions completely and utterly wrong.

That said, most agree there have been some positive signs in the last few months, particularly in the housing market. Whether you see these signs as simply less negative than before, a dead cat bounce, or true green shoots, is a matter of opinion, but there has certainly been some stabilisation.

Economic alphabetti spaghetti

Recessions and recoveries can be described as V-shaped, U-shaped, L-shaped and W-shaped -- reflecting the shapes they make on a graph. The recession in Japan in the nineties, for example, was L-shaped, with the economy flatlining for years. On the other hand, the 1950s recession in the US was V-shaped, with growth having fallen and returned to trend in less than two years.

But what about this one?

The UK housing market, in particular, seems to be currently experiencing an upturn which places it in the V or W camp (or perhaps bumping along the bottom of a U).

My money is on W as each positive statistic has a lingering element of doubt attached to it that suggests further decline looms. It's unlikely that the summer upturn is sustainable and that we'll be back to 2007 volumes and house prices in the foreseeable future. Quite simply, current mortgage criteria will not allow it, and until lenders begin to offer higher loan-to-value (LTV) mortgages, the housing and mortgage markets are stifled.

Far more likely in my view is that we will experience a double dip. In other words, these green shoots will be followed by another downturn before a proper pick up at the end of the big W. This is not my own theory (I'm not clever enough) -- economists are increasingly turning to the idea of a W-shaped recovery.

So what are the positive signs that suggest an upturn, and why aren't they completely convincing?

Arrears and repossessions down

Arrears and repossessions figures released from the Council of Mortgage Lenders (CML) in August look a lot less frightening than might have been expected.

The number of mortgage repossessions fell in the second quarter of the year by 10%, while cases of arrears levelled off (though they are still high at 1.85% of all loans).

This is partly due to lenders being more flexible with struggling borrowers and partly due to low interest rates. 

On the surface, the figures are positive. Unfortunately, recent unemployment statistics suggest that arrears and repossessions could rise in the coming months as households struggle to pay their bills. And of course, when interest rates eventually rise, many borrowers will inevitably find increased mortgage repayments difficult to manage.

Lending up

Gross mortgage lending totalled £16 billion in July, a significant 26% increase from £12.7 billion in June, and the highest level in nine months, according to new data from the CML.

However, mortgage activity is still subdued historically; this is the lowest July lending figure since 2001 and £11 billion lower than the July average over the previous seven years of £27 billion.

June and July are usually strong months for the housing market, according to the CML (news to me -- isn't the summer traditionally slow?) so the increases could be seen as reflective of seasonal variations, especially when compared to an exceptionally weak winter.

Increasing property values

According to Government figures house prices rose by 2.6% in the second quarter of this year. They were still down 10% over the year but the recent figures could reflect the beginning of an upturn. Or they could simply highlight the chronic lack of supply keeping prices artificially high!

The figures are based on mortgage completions up to the end of June so they tend to lag a few months behind other house price indices. Nationwide and Halifax's, for example, are based on offers accepted and therefore provide a more up-to-date snapshot. Nationwide noted a rise of 1.6% in August, up for the fourth month in a row, while Halifax recorded an increase of 1.1% in July.

Plus, the Royal Institution of Chartered Surveyors recently said it is likely that UK property prices will be higher in the last quarter of 2009 than in 2008.

Key indicators

While it may be the nation's favourite obsession, the housing market is, of course, just one of a range of key economic indicators. Below are other headline statistics, showing a mixed recessionary bag. While there are cautious signs of optimism they are tempered by some worrying trends, in particular rising unemployment.

• Inflation is stable according to last week's figures with the Consumer Prices Index at 1.8% and the Retail Prices Index (which includes mortgage costs) at minus 1.4%
• Unemployment is high at 2.4 million, and it is expected to reach 3 million in 2010. There were 427,000 job vacancies in the three months to July 2009 -- the lowest figure since records began in 2001
• GDP decreased 0.9% in the second quarter of 2009, compared to a fall of 2.4% in the first quarter -- with many sectors showing a slowdown in the rate of decline
• Retail sales rose by 3.3% from July 2008 to July 2009
• Manufacturing output was 12% down year-on-year in July, though just 0.2% down in the last quarter
• And the less said about public sector debt the better. Gulp!

Whether you are an economist or not, there are few people who believe we are truly out of the woods at this stage -- though if you do think that, please post your thoughts in the comments boxes below.

Perhaps you think things are going to get a lot worse before they get better. Or like me, a bit better before they get worse -- the W-shaped recession.

As with any predictions, every one of our opinions is valid. As this crisis has taught us, the 'experts' certainly don't know it all.

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