The latest Nationwide house index was published today which showing a moderation in the rate of decline with prices falling 0.40% in November as against 1.3% in October. The annual rate of decline is now down to 13.9%. Whilst this is obviously positive news for homeowners, we do not believe that this marks the end of house price declines. With deteriorating economic conditions and funding for homeowners still constrained, we believe that prices will continue to fall until around Q3 next year when we believe they will begin to stabilise.

Predicting when the market will begin to stabilise and then when it will recover is obviously partly a matter of conjecture. However we believe that there are 3 key indicators pointing to Q3 2009 as the likely timing:-

• The rate of decline over the last few months means that by Q3 2009 prices will be down around 25–30% from their peak. Whilst we do not believe that affordability issues were the trigger for house price declines, we do see them as an important part of the recovery process. With prices off circa 30% and with interest rates significantly lower, affordability will be back to levels not seen since the late 1990s. Most people fundamentally know that in the long term housing is one of the best and most secure investments, irrespective of its actual function as a roof over your head. With prices down significantly and affordability at very good levels, we expect buyers to start to return to the market. Obviously affordability is linked to available funding, a major issue to date, which links into our second point

• The government is throwing the proverbial kitchen sink at the banks and the economy in general, with Mervyn King refusing to rule out nationalising the banks if they refuse to play ball. The pressure on the banks; the Crosby report recommending government intervention in the RMBS markets and the fact that the government already owns a lender (Northern Rock), will mean that whilst not returning to ‘normal’ (when we look back at history the 2006/7 lending will be seen as anything but) liquidity will be significantly improved by the summer of 2009. As a related point, if the government really needed to, it could change the mandate of the Rock and postpone or reduce the repayment of its debt allowing it to restart a serious lending program again (but not with 125% LTV products!). In effect the Rock would be lending government money directly to consumers.

• The final point are the basic macro factors underpinning UK housing. In simple terms we aren’t building enough housing in the right places and haven’t been for 20+ years. House building is virtually coming to a standstill at present and the government’s target of 200,000 new homes a year rising to 250,000 by 2016 looks very unachievable. Couple this decreasing household size and increasing population and you have a very strong supply demand imbalance that act as a medium term brake on house prices and a long term accelerator.

 
There are obviously a number of unknowns at present, particularly around the length and depth of the recession and levels of unemployment, but we continue to see the current correction as very short and sharp. For a number of reasons, which I will cover in a separate blog, this is NOT the early 1990’s

Details of the latest Nationwide report can be found by clicking here