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From The Sunday Times

May 11, 2008

Fall in house sales hits builders, estate agents and mortgage brokers

Spring weather may have arrived, but cold winds continue to blow through the housing market

David Smith

Spring weather may have arrived, but cold winds continue to blow through the housing market. Mortgage brokers are finding there is no longer much for them to broker and are feeling the pinch.

In fact, anybody connected with new homes is struggling — which means the builders themselves and their employees, the self-employed tradesmen they use and those whose job it is to market housing developments to potential buyers. Estate agents are closing offices and shedding staff.

The common concern is that all these people depend on volume, and volume is sharply down. Mortgage approvals are running 40%-50% lower than a year ago, and every other housing activity measure is weaker than it has been for years. This matters to those involved in the industry rather more than prices. Most estate agents would be quite happy to see prices a lot lower, provided it meant the amount of property that changes hands returned to something like normal.

So, how serious is the downturn in activity? All roads appear to lead back to the early 1990s. Richard Donnell, of Hometrack, thinks that some activity measures, such as housing starts, will drop below the low point seen during that recession. Transactions have in any case been significantly lower in recent years than they were then, reaching only two-thirds of their peak in the late 1980s — which means the downturn has started from a lower base.

This is both good and bad news. Goldman Sachs, in a research note, says that 2008 “is not 1990”. The boom has not been as powerful as then, it reports. Houses are less overpriced and the number of households at risk of negative equity is much smaller, because far fewer people have bought at or near the top.

It is no cheerleader for the housing market. Ben Broadbent, its UK economist, expects a 15% fall in prices from peak to trough. But, whereas in the early 1990s a fall of this magnitude pushed 7% of households into negative equity, a similar fall now, were it to occur, would affect only 2% in that way.

“Fewer people bought at the peak — turnover was much lower last year than in 1989 and, as far as we can tell, a smaller fraction of buyers have been very highly geared,” writes Broadbent. “The share of high loan-to-value lending has been much lower.”

The key is whether lending can recover before confidence is so shot that even when mortgages are more readily available, people will not want to take them up. Goldman Sachs’s analysis shows that this is not a mortgage-rate “shock” — contrary to what you have read in the headlines, average rates have actually dropped so far this year, though not as fast as the Bank of England’s base rate. Goldman Sachs’s note suggests that the Bank rate will be down to 4% by the end of the year.

We are, however, experiencing a rationing shock. Everybody involved in housing will be hoping that the market comes off iron rations soon.

home.economics@sunday-times.co.uk

An unseen factor is the number of owners who bought homes abroad on remortgagedUK property. Spain's market has collapsed. Many baby boomers planned to sell their UK properties in a few years, increasing market supply, and move abroad with a bundle of cash to live on. Something has to give there.

David Hall, Bangkok, Thailand

Six months ago the Times was full of contributors saying a housing downturn couldn't possibly happen in the UK, as we are not the USA.

With the "buy to let" frenzy of the last few years we are likely to see far more selling of property, as owners reach the point of no return.

Ian, Madison, USA

The diffwerence between Housing and Fodd and clothing, is , you can rent housing, its a little tricky to rent food or clothing(unless Black Tie or Fancy Dress), so expensive house prices doesn't mean more people on the streets, it just means more have to rent, like in France and Germany.

Stuart, Romford, England

Vested interests are admitting that we are going to have a correction. That means you need to at least double their estimate to get the real figures. In parts of Fulham asking prices have risen by about 60% in the last 2yrs & City boys are putting their houses on the market. Who's going to buy?

Greg, London, England

its amazing that the banks hve stopped lending more money to people that they would ever be able to afford to repay. Its even more amazing that it was allowed to happe in the first place. And truly astounding that commentators are now surprised that this 'rationing' is occurring.

AndyB, Swindon,

Come on and smell the coffee. The banks know that property prices are set to free fall and they are protecting themselves. Do not consider buying untill the banks open up on lending again, because untill that happens we have not reached the bottom. It will not be a mere 15% thats for sure.

David Louis, Coventry, UK

I offer this sentence "During the preceding boom, credit expansion had caused an unsustainably high rise in living standards and the propaganda about a “new era” created the idea that this standard was some sort of divine right" This came from an analysis of the 1920s and the Great Depression.

Peter Baker , Fareham , Hampshire

It's very good news that prices are falling. It's bad to have expensive property just like it's bad to have expensive other things. Having a roof over your head is essential, just like buying food and clothes. Lower prices are a very good thing and hopefully they will fall 50% more.

Jake, Oxford, UK

This is not a "mortgage rationing shock"

The mortgage market is simply resuming a normal service.

The last 5 years of overlending was the blip.

Jin, London,

It is amazing that people will pick the statistics that they want to provide evidence of their views. The reasons for repossessions are the same as in the 1990s and now. If you cannot pay your mortgage bill, they house will be repossessed.Repossession in large numbers=price falls or stagnant markets

Bob, London, UK

This article contains so many errors it's hardly worth commenting on, except to say that they bleat on about a recovery soon, but with only half the LTV loan available now, say, 3 times wages instead of 6 or more, nobody can afford the prices at these dizzy heights. The maths will drive prices down.

Np, England, UK

This is great news. The sooner property prices are down between 30-50% the sooner people can buy, have families and live there lives.

I hope the days of rampant property speculation and the society destroying buy to let brigade are gone forever.

Gavin, London,

What David calls rationins shock is simply banks lending at more sensible loan-to-values, and requesting a perfectly logical, sensible and prudent 20% deposit... as it should have been in the past and - i am afraid to disappoint the cheerleaders - it will be for a long long time!

Roger, Ealing,

"2008 “is not 1990”. The boom has not been as powerful as then" On the contrary, property prices as a ratio to average earnings are hugely greater then in the 90's. So too is the level of mortgage debt as a ratio to average earnings.
This crash will be much greater than that in the 90's.

Allan, Inverness,