If the Dreaded Double Dip Happens, House Prices will Sink

By March 11, 2010Articles

UK-falling-house-pricesIn the latest survey of house prices from the Royal Institution of Chartered Surveyors there is worrying evidence of price weakness; worrying because this is a probable sign of what is to come.

Writing in today’s Daily Telegraph, Ian Campbell explains:

The problem stems from lack of funds for both lending banks and first time buyers. Lending banks previously relied on deposits made by UK savers backed up by borrowing from residential mortgage-backed securities (RMBS) – two thirds of RMBS were sold to foreign investors. Then, in 2008, the RMBS market ceased to exist, having been bought by the US Federal Reserve. The Bank of England set up two special funding schemes to help fill the gap left by the RMBS but both are due to end in 2014. When that happens, the Council of Mortgage Lenders calculates that Britain’s lenders will face a funding gap of £300 billion.

These are the facts behind the rise in deposits – first-time buyers are being asked for almost three-times the deposit they would have put down three years ago. No wonder then that, whilst mortgage approvals improved last year, they only reached half the levels of the boom years.

So, lack of funds leads to lower house prices; the average would have to fall 17% for the ratio of price to earnings to get back the long term level of 4 from the current 4.8. The powers that be need to make a concerted effort to prop up growth and earnings if the property market isn’t to fall even farther than before.