The market outlook
Nationwide said house prices continued to 'tread water' in September with a 0.1 per cent monthly rise, but were down 0.3 per cent on year ago.
The building society forecasts that the market stalemate will remain and that low mortgage rates will keep the property market's head above water, despite the eurozone crisis and stalling economic recovery.
But headline statistics do not tell the full story, the Land Registry's latest figures paint a stark picture of a nation divided. London house prices are nudging their pre-financial crisis peak levels, and the capital is the only region to see property up over a 12-month period, with a 2.1 per cent rise. Across England and Wales as a whole prices are down 2.6 per cent - 12 per cent off the January 2008 peak.
Buyers vs sellers: the great stand-off
Estate agents still report a stand-off between sellers and buyers, with the former reluctant to cut prices and the latter unwilling to pay over the odds. Home sellers must either have a desireable property to sell in an in-demand area or be willing to lower their expectations, if they want to get a sold sign up outside their house. But the real mark of this housing slump is not the statistics based on mortgage approval figures (Halifax and Nationwide) or even sold prices (Land Registry and others), it is what's happening to the homes that aren't selling.
With buyers seriously limited, properties that don't tick all the right boxes are sitting on the shelves unless sellers are willing to cut the price, and with low rates keeping forced sellers to a minimum many are just sitting unsold.
The forecasts
Overall forecasts for the market are gloomy. Most agents suggest the balance has now tipped to what would normally be a buyers' market (if sellers would lower prices) and RICS' August report showed 23% more members suggesting prices would fall rather than rise over the coming months. House prices will fall 10.5 per cent in real terms over the next five years, as inflation outstrips their rise, according to a NIESR forecast. It has prices to ease 4.5 per cent in real terms in 2011 and then 'by an average of 1½ per cent per annum in the subsequent four years.'
This pattern could see house prices post small nominal rises, but the economic forecasters see these as falling behind RPI inflation. The silver lining to this is that if wages rise over this period, property could become more affordable without more homeowners falling into negative equity.
In August, economists CEBR forecast prices rising from 2011 to 2015 by 14% - slightly lower than the 16% growth predicted in May.
The headwinds facing the market
The big potential stumbling blocks for the property market.
Interest-only mortgage crackdown Lenders face a mortgage crunch Austerity measures and the Eurozone crisis Lenders have made it much tougher to take out cheap interest-only loans, which have helped prop up the property market. This is a reduction in credit and will exert downward pressure on prices.
The second problem is that lenders are still cash-strapped. This year is a crunch year for lenders in terms of refinancing their debts. For example, the Bank of England's Special Liquidity Scheme is currently being unwound, with lenders refinancing their emergency funding by January 2012. This is progressing better than many expected and some banks and building societies are keen to lend, yet this is nowhere near normal levels of business and money is tight and reserved for only the best borrowers.
But the Eurozone debt crisis is weighing heavily on the banking sector - it may have contributed to a dramatic fall in swap rate money market costs and the fixed rate mortgages that these heavily influence, but if things get worse banks will find their balance sheets hammered.
Government cuts will also start to filter through soon, as the UK tries to balance the books. That will mean public sector job losses, higher taxes and a dip in confidence.
The cost of moving is also sky-high. Those buying family homes in areas where a relatively modest property of this kind costs more than £250,000 face a stamp duty bill of at least £7,500, add estate agent and solicitors' fees and moving can set a normal family back £15,000 or more, without even having to find the extra cash for a 25% deposit on a more expensive home.
Should you buy a home?
For many areas confidence never returned after prices started falling at the end of 2007, but for in-demand locations, especially in the South East and London, it was back to the boom from mid-2009 onwards. But that looks to have ended, although some hopeful sellers are still demanding 2007 prices.
The flipside to the lack of confidence and falling prices is that on the surface mortgages continue to get slightly easier to secure and borrowed money at the moment is cheap by historic standards. So if you can get a good deal and a good rate, now is a good time to buy provided you accept prices may fall in the short term.
Mortgage rates for those with a 25% deposit look very good, while rates for those with 15 per cent and 10 per cent deposits are improving. If lenders are willing to let borrowers through their tough lending criteria, this could deliver buyers for whom property looks affordable if prices ease back.
The questions are whether they want to take the plunge while the effect of spending cuts filtering through the economy and how on the other side of the fence lenders will be hit by tougher regulation and their own lack of confidence.
So should you buy?
The answer should be based on how long you plan to own the property (whether as a home or investment), whether it personally suits you and most importantly whether you can afford it. Buyers preparing to take the plunge should bear these factors in mind and ensure they can take the hit of future interest rate rises and a fall in house prices.
Confidence may return and the property market rise from here, but if things take a turn for the worst it is also not unrealistic to see prices falling by 10% over the next year or two.
Caveat emptor (buyer beware) and make sure you'd be happy in your new home, because you could be stuck there in five years' time.
House price history - what you need to know
Anatomy of a house price slump: how it happened
The party finally came to a sticky end for UK property prices in 2008. After a decade long boom, the market peaked in late summer / autumn 2007, and then prices tumbled as banks beat a hasty retreat from easy lending. House price falls accelerated through 2008 and property market activity hit record lows in late 2008 and early 2009.
The property market's performance in 2008 was worse than almost all of the gloomiest predictions made for the year. Of the major reports, the gloomiest picture was painted by the Halifax. Its index showed the average property losing a greater percentage of its value in just 12 months than during the whole peak to trough period of the 1990s crash.
In December 2007, the Halifax index said the average home was worth £197,074, a year later this had fallen to £159,896 ' a drop of 18.9 per cent. At the peak before the 1990s crash, Halifax's figures show the average home was worth £70,247, in May 1989. Six years later, property prices bottomed out, in July 1995, at £60,965. This was a peak to trough loss of 13.2 per cent, although it was much larger in real terms.
The Land Registry's report showed property prices falling by 13.5 per cent over the year, with the average home in England and Wales worth £158,946 ' a similar value to October 2005.
Even in the supposedly robust London market, the average home lost 12.9 per cent, or £45,585, to end 2008 worth £307,071 ' a similar value to November/December 2006.
How the property market was hammered?
While property price statistics for 2008 and early 2009 painted a fairly bleak picture, they did not fully reflect the devastation wreaked so rapidly. In a little over a year, a booming property market became desolate, with the Royal Institution of Chartered Surveyors reporting its agents selling less than one property per week of the year.
A perfect storm hit the UK property market in 2008. With property prices having risen by 200% in the ten years to December 2007, according to the Land Registry, property was in a bubble. Many economists had predicted that this bubble was ripe for bursting, but after showing signs of a slowdown in 2005, the market sped up again and the average price peaked between August 2007 (Halifax: £199,612) and January 2008 (Land Registry: £184,784).
The pin that burst the bubble was the credit crunch. The sub-prime crisis that had been brewing in the United States erupted in the summer of 2007, and as the year continued, the residential mortgage-backed securities market that had driven massive growth in credit for homeloans essentially ceased to exist. These allowed lenders to sell packaged residential mortgages to a special purpose vehicle, which then issued debt to investors, lured by strong returns from a supposedly liquid and low risk investment.
According to the interim report by Sir James Crosby, commissioned by the Treasury, between 2000 and 2007, the total amount outstanding of UK residential mortgage backed securities and covered bonds rose from £13bn to £257bn. The report said that by 2006 mortgage-backed security funding accounted for two-thirds of new net mortgage lending in the UK.
In July 2007 this market came to an 'abrupt halt', according to Crosby. This brought about the collapse of Northern Rock in the UK, problems for banks such as Bradford & Bingley that had fuelled the buy-to-let boom and major issues for all mortgage players. In February 2008, Northern Rock was nationalised and American bank Bear Stearns, which had specialised in the fancy finance that fuelled the mortgage boom, collapsed. It was the final sign that the party was over.
Banks fearful of huge losses began to dramatically cut back on mortgage lending and a vicious circle began. The more banks cut back on lending and raised deposits, the fewer homebuyers could secure finance, the more property prices fell and banks became more fearful and cut back further on lending.
The mortgage crunch and property prices
Mortgages are the key to the property market. The vast majority of buyers cannot purchase a property without a homeloan and the price, availability and restrictions imposed on these have the biggest impact on their ability to buy a home. The dramatic slump in property prices in 2008 and early 2009 came as lenders turned off the mortgage taps.
Lenders suffered a lack of funding, with the mortgage backed securities market that accounted for two thirds of new lending suddenly seizing up. Meanwhile, banks were also hit by a crisis of confidence, as they looked over the Atlantic and saw the devastation wreaked in America heading for the UK. Mortgage rates rose, deposits were hiked and reports abounded of lenders pulling mortgages at the eleventh hour.
Mortgages for home purchases dived by 49 per cent in 2008, to just 516,000, according to the Council of Mortgage Lenders. This was the smallest number since 1974 and represented a third less than the 723,000 approved in 1991 ' the lowest level of the 1990s slump.
The Bank of England's monthly figures have also shown mortgage activity drying up. The number of mortgages for homebuyers hit a record low of 27,000 in November 2008. In September 2007, just before the downward spiral began Bank of England figures showed mortgage approvals for homebuyers of 102,000 ' significant at that time as this was the lowest level for two years.
Inflation and paying off your home
One of the effects of the rapid inflation in property prices since the early 1980s is that it paid off a generation's mortgages. Those who bought a home in the 1980s to early 1990s, and then held on through double-digit interest rates and the 1990s crash, have emerged with properties that have risen to be worth five to ten times their mortgage.
The average UK property cost £30,898 in 1983, according to Halifax, and £198,500 in September 2007 ' an increase of 542 per cent. Even allowing for the current slump that property was worth £160,327 in February 2009, an increase of 419%.
For a similar effect to be delivered to a modern day homebuyer, the cost of the average property would need to stand at £832,097 in 2035. In 1983 the average wage according to the Office of National Statistics was £7,700, today the most comparable measure stands at £24,900, an increase of 223 per cent. If both property and salary inflation are sustained at the same long-term rate, the average wage by 2031 will be £80,500 and the home will cost 10.3 times more.
This compares to the average home costing four times the average wage in 1983 and 8.5 times the average wage (£23,300) at the peak of the Halifax index in August 2007. The big problem is that since 2000 wages have not risen anywhere near as fast as property prices or general prices in the economy, and since recession struck they have barely risen at all while inflation has returned with a vengeance.
The idea that inflation pays off individuals' debts really only helps people if their wages rise in line with prices - otherwise inflation is just making them poorer.
The positive side - demand and supply and property prices?
Pessimists would have you believe that property in the UK is doomed, but this ignores the fact that housing is not stocks and shares. Owning a home is an emotional desire, a must-have aspiration for most Britons, and the demand for property in Britain remains high.
Prices may have fallen by 20%, but many potential buyers see this as a good purchasing opportunity. The shortage of supply of property in the UK compared to demand has arguably been exaggerated by developers and the Government, but decent sized family homes in popular areas are typically in short supply.
Government development targets and planning guidelines have focused on quantity rather than quality. Target-led development has encouraged major scheme developers to concentrate on flats and small properties in order to deliver the most homes at the cheapest price.
A report by the National Housing and Planning Advice Unit the government's independent housing experts said that an undersupply of larger homes pushes up the cost of all properties and exacerbates house price inflation problems.
House price crash:
Not everyone is upset While falling property prices has brought tough times for those who have seen equity slashed, fallen into negative equity or even had their homes repossessed, there are others who are pleased that prices are falling.
Lower property prices are a boon to first-time buyers and those moving up the property ladder, but only if they can raise the substantial deposit needed to take advantage. The UK's high house prices are a drag on its economy, they hamper movement, encourage boom and bust and leave it vulnerable to shocks. Narrowing the gap between property prices and wages and making buying a home less of a gamble, would be a good thing.