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House prices fall as recovery stalls

By Channel 4 News

Updated on 10 August 2010

As house prices fall for the first time since July 2009, amid fears the economic recovery could be hit by declining consumer confidence in the face of major public sector cuts, one property expert tells Channel 4 News the worst is still to come.

house prices fall and retail spending slows as public anxious about the future. Getty

Further house price drops are expected as demand weakens, according to the figures from the Royal Institution of Chartered Surveyors (RICS).

The professional body said eight per cent more of its members reported a fall than a rise in house prices in July, the first time a fall has been reported for 12 months.

The RICS suggested buyers were taking a "more cautious stance" as supply of houses for sale outstripped demand from buyers for the second month in a row.

The price falls could also continue, with 28 per cent more surveyors forecasting prices will fall, rather than rise, over the coming months.

However activity is likely to remain steady, with eight per cent more surveyors saying they expected the number of house sales to rise rather than fall.

The National Association of Estate Agents also published its figures today, which were slightly more upbeat, suggesting both demand and supply increased in June.


RICS spokesman Ian Perry said the drop in prices was "a reflection of both the increase in supply following the scrapping of Home Information Packs and the more cautious stance from buyers."

He added: "Significantly, the forward looking price expectations numbers suggest that this softer trend will continue through the second half of the year. However, agents are still generally optimistic about sales activity which should benefit from more realistic pricing of properties."

"The mood has changed, and there is the risk of another contraction," Josh Miller, a senior economist at RICS who worked on today's data, told Channel 4 News.

"But we don't see a double dip or a return to recession. And today's data is largely related to supply, which is largely related to the abolition of Home Information Packs (HIPs), rather than people being forced to sell.

"People like to test how much their houses are worth by putting them on the market. When HIPs were introduced it became expensive to do this. Now they are gone, people are putting their houses for sale again to test the market, so there is a lot of supply, but they are not distressed sales or because people are unemployed.

"At the same time, demand is falling, so there is downward pressure on prices," he said. 

"The lack of buyers is due to the lack of mortgage finance. In the darkest days, in November 2008, there were only 26,779 mortgage approvals by the Bank of England for that month. Now, we are at 49,815.

"So there has been some improvement but since the beginning of the year, the level of transactions has remained flat. In January it was around 47,000, in February it was 46,000, in March 48,000. So it has recovered a bit, but not too much. At their peak in November 2006, there were 129,112 approvals. The long term average since April 1993 is 91,000 a month, so we are about half that.

"According to the latest Bank of England Credit Conditions Survey, lenders expect mortgage approvals to fall again in the next quarter. This is to do with the relationship with wider economic and financial issues – the European sovereign debt crisis, and the talk of slowdown everywhere. It is affecting confidence, and the government spending cuts and resulting rise in unemployment is also affecting their confidence to lend."

'We have not seen the full extent of the misery yet'
"There is a sense of inertia that is slumbering along but once things start to roll properly we could well see a much bigger impact of the budgets and the cuts," James Moss, director of specialist London-based company, Curzon Investment Property, told Channel 4 News.

"It is important to remember when faced with these figures that prime property will always hold its value and that there will always be pockets of affluence across the country that will buck any downward trend.

"It is also important to remember that all talk of house prices can only be hypothetical as a person's house is only worth a particular price at the time that they come to sell it.

"Having said that, there is no doubt that property in secondary areas such as the North East will lose its value as cuts take hold.  In Liverpool for instance, where there are a large number of public sector employees, job losses over the next year will have a profound effect on the market.

"There is a very real risk that interest rates will increase significantly over the next few years and the happy days of cheap mortgages will end. Unless people have put by money they saved in good times they might find that higher interest rates could push them over the edge.

"We have certainly not seen the full extent of the misery just yet."

The gloomy housing data joins a report from the British Retail Consortium suggesting that the public is shying away from buying "big ticket" items due to anxieties about public sector cuts and the wider economy.

Retail sales grew just 0.5 per cent on a like-for-like basis in July, down from 1.2 per cent in June. Non-food items were the worst hit, with shoppers shunning non-essential purchases, the latest BRC-KPMG Retail Sales Monitor showed.

Unsettled customers
Sales of home accessories and house textiles fell back below levels a year ago, and furniture and flooring sales also plunged as consumers chose to postpone major redecoration projects. Poor weather and the end of the World Cup also hit sales.  

Stephen Robertson, director general of the BRC, said: "Talk of public spending cuts is unsettling customers and they are concentrating on essentials.

"It's clear the recovery continues to need support."

Channel 4 News spoke to shoppers at the Castle Meadow Retail Park in Nottingham who said the current economic climate certainly made them "think twice before going out and buying."

A generalised fall in consumer confidence arising from the austerity budget was not expected, writes Channel 4 News Economics Editor Faisal Islam:

Retailers are running a record rate of promotional activity, nearly four pounds in every 10 spent in the UK is now on some sort of meal deal, ’three-for-two’ or other discount. Even the unstoppable boom in online sales has slowed markedly.

The housing market too is taking a big hit, with sellers pouring on to the market, and buyers battening down the hatches.

As economist Roger Bootle says, the surprising thing is that austerity has hit, even before tax rises and spending cuts have actually bitten.
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Growth in internet, mail order and phone sales also slowed to 11.3 per cent year-on-year growth, the worst performance for almost a year.

However, at least sales were continuing to grow at all, albeit weakly, accountant KPMG's head of retail, Helen Dickinson, said.

"Spending at least continues to hold up and is likely to continue to do so, at least until the effects of government measures begin to hit people's pockets," she said.

'We're in a very bad place'
There is growing evidence that the world economy is slowing, economist David Blanchflower writes for Channel 4 News.

Initial jobless claims in the US have risen again and consumer confidence there is falling, raising the fear that consumer spending will drop.

Japan and China are also slowing. In the UK consumer confidence among individuals has recently showed alarming declines. There has also been a worrying increase in people's expectations of what will happen to unemployment, which showed its second biggest increase ever in July. Consumer spending looks like it is going to drop soon, as people worry about rising joblessness...So where does that leave us? Actually in a very bad place. 

The likelihood is that the economy is about to return back to recession and the latest growth data is as good as it gets. I still think it is very plausible that we will see one or more negative quarters of growth this year. 

This is the much talked about double-dip. Inflation is the least of our worries and in the medium term is no threat at all so this is no time to raise rates.

David Blanchflower is professor of economics at Dartmouth College and the University of Stirling and writes the economics column for the New Statesman. He is also a columnist at Bloomberg.

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