House prices - why are they falling?

APRIL is the month when hoards of For Sale signs line the streets, but not this year.

Falling house prices and increasing mortgage costs have sent the property market into deep freeze, sparking concerns of a crash.

Property specialist Rightmove says a record numbers of homes put on the market are failing to sell, with only the lucky few finding a buyer as people hold off taking the plunge in the turbulent climate. House prices fell by 2.5pc in March according to Britain's biggest mortgage lender Halifax, while The Royal Institution of Chartered Surveyors warns that prices are tumbling at the fastest pace for 30 years in England and Wales.

One of the biggest reasons for the fall is difficulty in finding an affordable mortgage deal. Since the credit crunch began several months ago, banks and building societies have become less than generous towards homebuyers.

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Deposit free loans have been scrapped, while lenders are refusing to lend to anyone who does not have a enough money to put down as a deposit. After a decade-long housing boom, the International Monetary Fund has voiced its concern that Britain is vulnerable to a devastating price collapse. And this comes on the back of a warning by the Bank of England that the mortgage meltdown is set to get worse.

Experts say the mortgage crises could bring on a property crash if the Bank of England's £50bn emergency rescue plan fails to work. The Bank hopes that by acting, it will help end the credit crunch, which has forced banks and building societies to cut cheap mortgage deals in big numbers.

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The number of mortgage deals has dwindled by 70% since last summer and it will worsen as 43% of lenders say they plan to cut back over the coming months. But while some economists predict house prices will fall by as much as 20%, others say a recession is unlikely.

"Overall, we expect there to be a modest fall in UK house prices this year", says Martin Ellis, chief economist at the Halifax.

"Declines, however, should be viewed in the context of the significant price rises over recent years.The average UK price has risen by £120,860 during the past decade from £70,696 to £191,556 - an increase of 171%."

"Sound economic fundamentals are supporting house prices. A strong labour market, low interest rates and a shortage of new houses underpin housing valuations. Our research shows that the labour market is the key driver of the housing market. Employment is at a record high and unemployment continues to fall."

"Sentiment is at a very low ebb and will continue to remain depressed while the economy suffers from this unique liquidity blight", adds RICS spokesman, Jeremy Leaf:

"The slowdown in prices is directly attributable to a lack of available finance which has hit demand. However, until new supply increases dramatically a significant crash remains unlikely. The next six months will be a crucial period for homeowners but would-be buyers with larger deposits may see this market as an opportunity to acquire property in areas to which they could not previously aspire as recently as the end of 2007."

Diana Choyleva of Lombard Street Research says: "We are now clearly at the end of the house price boom. We think there will be a correction next year, although it is unlikely to be as severe as the last crash."

24 April 2008 © Moneyextra.com

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