House prices drop to 2006 levels

House prices have rolled back four years, but how long before they boom again?

According to the latest data from the Land Registry, UK house prices have recovered from their April 2009 low and bounced back to summer 2006 levels.

Déjà vu

The Land Registry revealed that the average price of a property in England & Wales was £166,072 in June. Although prices have risen by an average of 8.4% over the past 12 months, June’s figure remains below the £166,206 recorded in August 2006. (Coincidentally, Déjà vu by Beyoncé featuring Jay-Z was Number One back then, hence my above heading!)

Here’s how house prices have changed since 1995, when the Land Registry’s House Price Index began:

Average house price in England & Wales, 1995-2010 (Land Registry)

As you can see, house prices rose for 12 years in a row, peaking in 2007 before tumbling a seventh (14%) in 2008. According to the Land Registry, the average house price hit an all-time high of £183,499 in November 2007 before crashing a sixth (17%) to £152,582 in April 2009.

Thus, since last April’s low, the price of a typical home has rebounded nearly 9% in 14 months, which will be a relief to the UK’s 17½ million homeowners. Then again, a typical UK home is worth no more today than it was four years ago, which proves that house prices don’t always increase over the years.

12 obstacles to overcome

Clearly, the bounce-back which began in the spring of 2009 seems to be running out of steam.

Indeed, between January and June of this year, house prices in England & Wales rose by a feeble 0.6%, based on completed sales reported to the Land Registry. In addition, despite their recent recovery, house prices remain a tenth (10%) below their November 2007 peak.

What’s more, according to several housing forecasters, house prices will fall back in late 2010 and weaken further in 2011. Personally, I think it could be as late as 2017 before house prices exceed their 2007 peak in real terms (after accounting for inflation). That’s a decade of no real growth in house prices.

In a nutshell, for house prices to rise steadily, the market has to overcome a whole host of obstacles, including these ‘dirty dozen’ problems:

1. Government austerity measures, leading to lower public-sector spending and higher taxes;

2. Pay freezes or cuts in the private sector;

3. Rising unemployment (almost 2½ million people are currently out of work);

4. Continued rationing of mortgages, with low rates available only to the safest borrowers;

5. The withdrawal of a huge swathe of home loans since 2007 (including self-certification loans);

6. New rules to regulate mortgages, including income checks on all applicants

7. Likely increases to the Bank of England base rate (and therefore mortgage rates) in 2011;

8. A low level of completed sales distorting the market and temporarily supporting price levels;

9. The withdrawal of the Bank of England’s Credit Guarantee Scheme (CGS) and Special Liquidity Scheme (SLS) from April 2011;

10. The scrapping of Home Information Packs (HIPs), making selling easier and cheaper;

11. A rising number of sellers, giving buyers the upper hand;

12. Reduced consumer confidence and mounting fears of a double-dip recession.

On balance, it seems that there is more downside than upside to come, which is why I remain bearish (pessimistic) about the near-term direction of house prices. I’ll leave it to the housing bulls to list the positives in the Comments box below...

Low prices are a good thing

Finally, why should we celebrate when house prices rise year after year after year? We do the exact opposite when the price of, say, fuel and other goods rises, so why do the opposite with house prices?

Personally, I can think of at least seven reasons why lower house prices would be good for Britain!

More: Don’t miss this ultra-low 2.19% mortgage rate | House prices: What the forecasters are saying