The problem is that it is not easy to stabilise house prices. The record since 1980 is not good. However, one of the best policies would be to try and regulate the availability of credit. Making banks save in boom years, so when the downturn comes, banks can draw on their savings (rather than rely on government bailouts)

Yes, this involves intervening in the free market. But, the evidence of the recent boom and bust is that left to its own devices the free market creates a very unstable and volatile situation.

See: How To Avoid Boom and Bust in Housing Market

In part this reflects the UK economy which is experiencing a steep recession and sharp rise in unemployment [See: UK Economy 2009]

There is a strong link between the housing market and UK economy. One of the main factors behind the current recession is the falling house prices. As house prices fall, consumer spending tends to decline as confidence evaporates and people can no longer re-mortgages. The recession is making the house price fall even worse, creating a negative downward spiral.

House Prices in 2009

The negative momentum in house prices will continue throughout 2009. See: predicted house price falls

Mortgage Lending in 2009

Mortgage lending is currently at an all time low. The government is trying to put pressure on banks to revitalise mortgage lending. Whether this is successful will have a big bearing on the future of the housing market

New Home Builds.

The government has a target of building 240,000 homes a year, but, the construction industry is in recession and the number of new houses coming onto the market is likely to be very low. Due to the time lags involved in building houses, this is creating a shortage of housing which will be a problem when housing market recovers.

House Price Fall

This graph shows the sharp fall in house prices which have occured in the past few months. Most analysts expect further house price falls.

Mortgage lending still frozen. The number of new mortgage approvals is very low. The number of new mortgage loans is 52% lower than October 2007. (already by Oct 2007, mortgage approvals had fallen). WIth banks unwilling to lend mortgages, it is hard for potential homeowners to get into a position to buy.[Times article]

Cumulative Pessimism. The housing market is volatile and prone to speculative changes. (see why housing market is volatile) With prices falling, there is a strong incentive to delay purchasing. People are renting until the market shows signs of bottoming out. If the last housing bust is a guide, this might not be for another 2 years.

Rising Unemployment and Falling Growth. The economic slowdown has been much sharper than predicted. Mervyn King has said the economic slowdown in the UK will be very steep. With rising unemployment, repossession rise causing more houses to be put on market.

The current housing difficulties have meant that the government’s target for building new homes has fallen well short.

In the 3 months to September new housing starts fell 33% on seasonally adjusted figures. Compared to last year they have fallen by 50%. It is the lowest level since 1980. It means the UK will struggle to build 100,000 homes in 2008 - well short of the government’s target of 240,000.

2009, is unlikely to see any upswing in the homebuilding market. As the UK population continues to grow it is causing the likelyhood of future chronic shortages in new homes.

1. Volatility. The UK Housing Market is characterised by boom and busts. There is a cycle of rapidly rising house prices followed by a sharp crash. This volatility in house prices creates problems for the real economy. When prices rise rapidly it causes a rise in consumer confidence, equity withdrawal and inflationary pressure. In the boom of the 1980s, the rise in house prices was a key factor in the inflationary growth which resulted in the boom and bust of 1991. Volatile House prices also create problems for homeowners, especially for those who buy near the peak and then face several years of negative equity.

Why Are House prices so Volatile?

• Supply is inelastic. Supply is unresponsive to rising prices because it takes a long time to gain planning permission to build new houses. Demographic trends mean demand for housing has risen at a faster rate than the supply of housing.
• Confidence Factor. When prices are rising, people are keen to make capital gains. When prices are rising, lenders are willing to loosen criteria and lender larger mortgages with small deposits, because rising prices effectively creates a deposit. Therefore rising prices encourage more to come onto the property ladder. Any change in the confidence of the housing market is exaggerated by the media who often make house prices front page news.
• When prices start to fall, the opposite occur. Lenders become nervous over negative equity so require large deposits. Consumers don’t want to buy when prices are falling. Therefore, a small fall in price becomes a large fall in price.

2. Sensitive To Interest Rates.

Despite the hopes of the government, UK Homeowners are still reluctant to take out long term fixed rate mortgages of 5, 10 or 20 year rates. This means many homeowners have variable mortgages or 2 year fixed rates. Therefore, fluctuations in the interest rates cause a significant change in demand and affordability. This is another reason why UK house prices are volatile.
(It would also create a problem if UK joined Euro and had a common monetary policy where interest rates may not be suitable.)

3. Shortage of Supply

The UK population is rising and is forecast to rise. Also demographic changes mean there are more single people because of:

• higher divorce rates
• more old people
• people leaving home early
• getting married later.

Yet, despite the predicted rise in population, the government frequently fails to meet its own targets for building new houses. The reason is that local councils and local communities often vigourously fight any new housing developments. There is a strong attachment to protecting the environment and reducing congestion (and perhaps an unconscious desire to protect value of house prices in the area) The long term shortage of supply creates a climate where rapidly rising house prices can occur with a small rise in demand.

The low volume of house price sales is indicative of the fact many homeowners are reluctant to cut prices to more realistic levels. Therefore, asking prices are inaccurate guide to the value buyers are putting on house prices. Many homeonwners are finding that only significant discounts from the asking price are helping to sell houses.

The deteriorating economic outlook means that interest rates are likely to fall in the near future. The question is how much rates will fall. Many are hoping for large cuts of 100 basis points. See: Outlook for interest rate cuts

When will the House price slump end?

With the economy experiencing a serious recession and banks still reluctant to lend mortgages, the fundamentals of the housing market point to further falls in house prices. Despite government attempts to help the housing market, it remains powerless to prevent house price falls. - Why government can’t prevent house price falls

Measures to help housing market at BBC

Shortage of credit, means that lending criteria remain very strict as banks are reluctant to lend any mortgages. The contraction in mortgage lending and fall in consumer confidence has caused a big fall in demand for houses. THe Halifax reports that house prices are now falling at their fastest rate for 25 years.

Finance Crisis Explained

In the UK, Bradford & Bingley has needed a government buy out. This will make the government the second biggest mortgage lender. When the dust has settled the UK banking sector will be much more highly concentrated leading to less choice for consumers.

The withdrawal of Bradford & Bingley will reduce the choice of mortgages, especially for buy to let landlords. This continued shortage of mortgages will cause further downward pressure on house prices in the short run.

On the economic front, the UK is facing a serious downturn due to a combination of problems in housing market, global economy and falling confidence - UK facing recession

There is a strong momentum for falling house prices and this is likely to continue into 2009. There are some bright spots on the horizon such as prospect of lower interest rates and a freeze on stamp duty. But, in the short term it is hard to see when the house price drop will end, as many wait on the sidelines for house price falls to bottom out.

House price forecast 2009

The Housing Market includes the following features

• Supply of housing - quantity of housing strock
• Demand for housing
• House prices
• Rented sector. Buy to let investment and demand from tenants
• Government intervention in the Housing market

Factors which affect the Housing Market

• Interest rates - which influence cost of variable mortgages
• State of mortgage industry, determines whether people are eligible for mortgages
• Economic growth, incomes and unemployment rates
• Population and demographic trends

Features of UK Housing Market

• The UK Housing Market is often volatile because of various factors. See: why the Housing market is volatile.
• The UK Housing market has an influence over wider economy. e.g. when house prices are falling, consumer spending tends to decrease.
• Because the housing market influences the economy and individual homeowners, it is important to try and be able to predict future movements in the housing market