Don't panic over falling house prices!

Five reasons we shouldn't worry about property prices

By anyone’s measure, there’s been a lot of doom and gloom recently surrounding UK property prices.

First Halifax came out with a dreary house price report, stating that June marked a hat-trick of monthly house prices falls, as Donna Werbner reported in House prices fall for three months in a row. The lender said average UK property prices fell 0.6% in June to £166,203.

On the same day the LSL/Academetrics index added to the negative vibe by reporting a 0.5% drop in average prices in June. Gloomy stuff.

This week things got even worse, with the Royal Institution of Chartered Surveyors saying that not only is the supply of property for sale increasing (to its highest level for three years), but demand is falling at the same time. And it predicts that this combination will lead to future price falls.

As if that wasn’t bad enough, Price WaterhouseCoopers forecast that house prices may not recover for at least 10 years in real terms (taking inflation into account)!

But despite so much negativity over the past week, there is also some cheery news to be found if you look beyond the headlines. Honest!

1. Not all negative

While a lot of the June indices pointed to falls in average prices, not all did. Indeed, some recorded growth during the month.

John Fitzsimons looks at some simple ways to boost the value of your home.

Nationwide’s house price index noted a rise in average house prices in June, albeit by just 0.1% to £170,111. Plus Rightmove reckons house prices rose by 0.3% last month, after increasing by 0.7% in May. Hardly a disaster scenario!

Property portal Zoopla has also pointed out that average UK house prices have clawed back 50% of the value that was lost during the recession, having risen by an average of £21,667 (11%) since March 2009.

It added that the London market has more than bounced back, with property prices now higher than they were during the previous 2007 peak!

So there has some positive house price data out in the last fortnight -- it’s just that the gloomier stuff tends to make the front pages.

2. Look at the bigger picture

House prices experience volatility in the same way other assets do, including the stock market. They do not go uniformly up and down all of the time. They fluctuate.

The current drops noted by some indices could well be the start of a downturn in the housing market, or they could be a blip caused by economic and political uncertainty. We have just had a fairly turbulent few months politically after all!

One way to get a broader picture is to look at the longer-term indicators, such as the quarterly or annual house price data. Here the picture isn’t quite so bad.

3. Forecasts still flat

In addition, the main providers of indices haven’t made any changes to their predictions for the year, which remain generally flat.

Halifax said in its June report that, despite the falls of the last few months, prices are in line with its expectation that they will remain broadly flat over the course of 2010.

Nationwide also predicts a flat market and, in this month’s house price report, it added that the impact of the recent Budget on the housing market would probably be neutral in the medium term.

Rightmove reckons that, while asking prices will probably fall over the second half of the year, the overall picture for 2010 is still stable prices, as they have already risen for 10 of the last 14 months.

If these three are right, then a housing market that neither rises nor falls in 2010 isn’t really something to panic about, is it?

4. Lies, damn lies and statistics

Now I’m not saying you can prove any point with house price statistics but, well, you pretty much can.

Related goal

Cut your mortgage costs and pay off your mortgage early

Find out how to cut the cost of your mortgage by hundreds of pounds a month and become mortgage-free years earlier.

Do this goal

There’s a raft of different indicators, all using different calculations and all coming up with different results.

Why should Halifax say prices fell in June but Nationwide claim they rose? One theory is that given their Halifax and Swindon heartlands, Halifax has a Northern bias and Nationwide a Southern one. The Southern housing market is currently performing strongly, so it makes sense that Nationwide would record more positive figures.

It’s also worth remembering that the only price index to give the actual prices paid and officially registered, is the Land Registry’s own house price index. Unfortunately it lags behind the others because it takes a while for that process to be completed. So its latest figures -- for May -- refer to offers made around February time.

Because we Brits want to know what is happening to house prices right here right know, the other indices use measures further forward in the buying process. Nationwide and Halifax take mortgage approvals (a proportion of which will not go through to completion), and Rightmove uses asking prices, which may not reflect the price paid at all, and perhaps says more about sellers’ expectations.

The indices give us a guide not a guaranteed picture of the housing market. In any case, regional and local differences render the averages little help to those who want to know about their own property’s value.

5. Would falling prices be such a bad thing?

Even if house prices did fall back a bit, would that really be too much of a problem?

Recent question on this topic

Goldwinger asks:
Can I get a UK mortgage for my property in France?
- MikeGG1 answered "You probably can. There is no legal reason why not. The problem is that if you switch to a..."
- Goldwinger answered "Food for thought thank you very much will consider UCB...."
- Read more answers

Of course, a major crash would be calamitous for many reasons, not least because the housing industry supports many families up and down the country, directly and indirectly. But would a small dip be so bad?

For those who are still planning to upgrade their home at some point, it has been argued many times that lower house prices are better than higher ones. If you’re planning to move from a £100,000 home to a £175,000 one, it would be better for you if both those properties fell by 10% than if they rose by 10%. Of course, it doesn’t feel that way when you see your equity slip away though.

But what do you think? Will average UK house prices go up or down in the next year, and is a fall such a bad thing?

More: Fix your mortgage at 2.69%! | Take 5 and forget about your mortgage!