Have house prices finally found their level?

Great article on recent UK house price rises and why falls have bottomed out earlier than expected.

David Smith: Home Economics

How do we interpret the latest house price numbers? The Nationwide says prices rose 0.9% last month, after a 1.3% increase in May. They have now gone up in three of the past four months, and the three-month-on-three-month change is positive for the first time since December 2007.

Caveats apply: Bank of England figures showed mortgage approvals rising but only modestly, and still well below normal levels. Mortgage rationing could put a lid on any further recovery in activity, and the fear remains of a W-shaped graph — where prices rise only to fall back again.

But what if the evidence from the Nationwide and the others means the fall in prices is over? What would that tell us?

Something rather interesting. Markets do not normally adjust in a smooth way — instead they overshoot, in both directions. When house prices have fallen in the past, they have not usually just come down to fair value: they dropped until they became cheap. That is why, if they have stopped falling now, it would mark a break with past housing cycles — possibly because the Bank of England has supported the market by cutting interest rates so aggressively this time.

Everybody agreed houses were overvalued in summer 2007. The question was whether that overvaluation would be worked off slowly — stagnant prices against a backdrop of rising incomes — or suddenly. Thanks to the credit crunch, and the squeeze on mortgage availability, we saw the latter.

Opinions differed on the extent of the overvaluation, but the International Monetary Fund’s estimate that prices were 30% above what was justified by fundamentals was often quoted. Factoring in inflation, we have seen the 23% fall in real terms needed to bring them into line with fundamentals. Other measures, including prices relative to their long-run “real” trend, as measured by the Nationwide, also show they are back in line.

It would be wise to wait to see what happens to mortgage availability over the autumn and winter before concluding that prices have stopped falling. Some say an overshoot on the way down is required to lure cautious buyers back into the market. Others are sure the fall is over. We shall see.

– There are further signs of recovery in the country-house market. The agent Knight Frank says the average price of prime country properties in the home counties rose by 0.8% in the second quarter of this year, but it is not just houses near London that have benefited: prices have also risen in the parts of the Cotswolds popular with second-home owners. Overall, prices fell back by 0.9% — but this was considerably less than the 4.7% drop in the first quarter. Prices of houses costing £5m-plus rose by 2.2%.

– Fernhill, in Mountain Ash, north of Cardiff, is the cheapest street in England and Wales, with the average house value just £24,640, according to a survey by Mouseprice.com, the property website. It is followed by Ann Street, in east Middlesbrough (£26,910) and Alpha Street, in Manchester (£28,890). The northwest of England accounts for half of the 20 most affordable streets.” (David Smith, The Sunday Times).  http://property.timesonline.co.uk/tol/life_and_style/property/buying_and_selling/article6632733.ece

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