Zero rating for gloomy forecast

With every data release showing a rise in house prices, the chorus grows louder warning that it cannot possibly last.  I agree with part of that: prices shouldn’t go on rising at their recent rate.

Last week, for example, the Halifax, reported a 1.6% price rise in September.  This converts to annualised growth of roughly 20%, not something we want.  At the very least, prices will end 2009 higher than they started it.

Halifax applied its own health warning to the figures, the third monthly rise in a row, warning that they did not prove the market had decisively turned.  Limited supply of houses may be distorting prices.

A bigger warning came from the rating agency Fitch.  It thinks that the recent upturn in prices is a false dawn, and that they need to fall 30% from their peak in October 2007 to restore their long-run relationship with incomes.  They were down by 19%, but have recovered to a cumulative fall of 13%.  If Fitch is right, they face another big downward leg, almost as big as the first; not so much as a double dip as a dive.

“The drag of rising unemployment and low wage inflation is yet to be significantly reflected in house prices,” says Alastair  “>Bigley, head of UK residential mortgage-backed securities (RMBS’s) at Fitch.  “Unemployment will peak next year and remain close to that high into 2011; this will inevitably weigh on house prices.”

I think Fitch is wrong.  My view is that it would be unusual for house prices to fall sharply again while the economy is recovering.  There is no precedent for that.  They may stumble, but a big fall would require another big financial shock, of the kind that slashed mortgage availability two years ago.  That’s my opinion, and you can agree with it or not.

What Fitch says, however, has consequences.  RMBS’s were the key to mortgage funding before the crisis, and Fitch’s ratings are important for the reopening of that market.  It’s forecast implies that it will look unfavourably on them until prices fall a lot, or it changes its mind.  Mortgage availability is increasing only slowly, and lenders are taking advantage by increasing margins.  Gloomy forecasts such as those from Fitch will maintain the mortgage famine.

Go Figure
The majority of people would be better off buying a home than renting one – provided it’s not in London – according to research from Abbey.  The bank, part of the Santander Group, says the price of the typical first-time buyer’s property is £92,861 – 9% lower than a year ago.  Someone buying such a home with a 25% deposit at a rate of 4.39% would face average monthly mortgage payments of £382; renting a comparable property would cost £434 a month.  Potential buyers in Wales could make the biggest saving, followed by those in the northwest.

The value of Britain’s housing stock stands at £5.25trillion, up £250 Billion from its March lows, according to the property portal  This compares with more than £6 trillion at the peak of the market in late 2007.  Zoopla estimates that the average British home is increasing in value by £57 a day. (David Smith, The Sunday Times)


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