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Guaranteed Rent Scheme | House prices drop by another £1400 in July as property market posts sharpest fall

 


Going down: House prices are falling at the steepest annual rate for three years, says Nationwide, although they are up on the start of the year.


Guaranteed Rent Scheme | Going down: House prices are falling at the steepest annual rate for three years, says Nationwide, although they are up on the start of the year.



House prices dropped by ?1,400 in July as the property market’s downturn deepened and property values fell at their fastest annual pace for three years, Nationwide has reported.


Property prices dipped by 0.7 per cent in July and are now down 2.6 per cent on a year ago.


That is the sharpest annual decline since August 2009, according to Nationwide, although property prices remain up slightly on the start of the year.


The average home is now worth ?164,389 compared to ?163,822 in December 2011.


However, property prices back at the same levels seen in May 2006 and have dropped 13 per cent below their 2007 peak on the Nationwide index.


Nationwide’s chief economist said: ‘The weaker price trend observed in recent quarters is unsurprising, given the disappointing performance of the wider economy.


‘Against this difficult economic backdrop, it could be argued that UK house prices have shown resilience. While prices are currently 13% below their 2007 peak, this is less than the declines seen in a number of other economies that have experienced similar or more robust economic recoveries.’


Nationwide’s report shone on a spotlight on three other economy’s property markets that have suffered worse downturns than Britain: the Netherlands, the USA and Spain, illustrated in the chart below.

Resilience: House prices in the UK have not fallen as elsewhere, Nationwide's report showed. Resilience: House prices in the UK have not fallen as elsewhere, Nationwide’s report showed.


Britain’s biggest building society said that its house price index had now recorded its fourth fall in five months in July, however, two of those monthly dips were caused by the statistical manipulation of seasonal adjustment and actually came as prices rose.


Seasonal adjustment is aimed at allowing typically better months to be compared fairly with slower months and involves shifting down the former down and the latter up. That meant that both March and April this year recorded monthly percentage falls when prices actually rose.

Stagnating: House prices have moved within a tight range since staging a recovery from their 2008 to 2009 lows, mainly through the support of low interest rates. Stagnating: House prices have moved within a tight range since staging a recovery from their 2008 to 2009 lows, mainly through the support of low interest rates.


Nationwide said that the Bank of England’s new funding for lending scheme, which starts today, should provide support for the property market as it intends to push cheap money through lenders to borrowers.


The BoE will lend cheap money to banks who then pass this on to borrowers with its funding for lending scheme.


Banks will be able to access finance at rates from around 0.75% – far cheaper than the equivalent 1.25% to 2.5% money market rates.


They will be able to borrow up to 5% of their existing lending stock, and for every ?1 of additional lending made by a bank, it will be able to access an extra ?1 of cheap funding from the scheme.


The announcement of the scheme has coincided with a flurry of mortgage rate cuts from banks and building societies, however, the headline-grabbing rates have still been aimed at top-tier borrowers who can raise large deposits.


HSBC, Santander and NatWest has all launched record-breaking five-year fixed rate mortgages below 3 per cent, but all three come with wallet-busting fees ranging from just under ?1,500 to ?2,500.


Rates have also been reduced for borrowers with smaller deposits, but those cuts have been smaller and their mortgages remain much more expensive.


While NatWest will offer a borrower with a 40 per cent deposit a five-year fix at 2.95 per cent, a first-time buyer with a ten per cent deposit must pay a rate of 4.79 per cent.


Despite the Bank of England’s desire to push cheaper mortgages through to borrowers, much of the gap in rates for those with smaller deposits comes from financial regulation which require lenders to hold far more capital against higher loan-to-value mortgages – thus substantially increasing the cost of funding them.


Andrew Montlake, of mortgage brokers Coreco, said: ‘With five year rates having fallen dramatically and now available from an extraordinary 2.95%, it is easy to get carried away, however, this needs to be channelled towards those who are finding it difficult to obtain mortgages, such as first time buyers with smaller deposits, rather than further swamping the 60% loan-to-value and below market where there is no problem obtaining finance.’

Still overpriced: The house prices to earnings ratio remains above its long-term average according to Nationwide. Still overpriced: The house prices to earnings ratio remains above its long-term average according to Nationwide.


While prices may have fallen in recent years, homes still remain expensive on measures such as the long-term price-to-earnings ratio – as seen in the chart above. In many places prices are also expensive compared to rents, which is what Charlie Cunningham, CEO of affordable homes developer FreshStart Living argues they should be compared to.


He said: ‘Despite the falls seen since the peak in 2007, houses are still overpriced across the country and there will be further price falls to come until values come back into line with the rental income they can command.


‘Prices of properties should be directly linked to the rent they can command, with a reasonable return being around six per cent. That means if a house can command a rental income of ?12,000 a year, then its overall value should be no more than ?200,000. Instead, buyers still assume that property prices will always increase, and build that expected capital growth into the price they pay – leading to properties being overpriced.


‘Rather than moves to encourage lending, the Government should be applauding banks for lending more responsibly and not encouraging first time buyers in particular to invest huge sums of money in overpriced assets.’


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