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The housing market: shrinking growth, not shrinking prices

10/03/2008

According to the Land Registry, the average price of a house in England and Wales fell by 0.5% in December 2007. This was the first monthly decrease since August 2005, and the largest since the Land Registry’s House Price Index became available in April 2000.

But the average price rose by 0.9% the very next month, and the average house was worth nearly £10,000 more in January 2008 than it was 12 months ago. That’s an increase of 6.4% – more than twice the 2.8% annual increase we saw in November and December 2005.

Since the occasional drop in prices is more than offset by the increases, house prices are still growing:

	Average (£)	Monthly change (%)	Annual change (%)
Feb 2007	176,319	0.9	8.3
Mar 2007	178,424	1.2	8.8
Apr 2007	178,891	0.3	8.8
May 2007	180,215	0.7	9.0
Jun 2007	180,835	0.3	9.2
Jul 2007	182,238	0.8	9.5
Aug 2007	183,065	0.5	9.7
Sep 2007	183,904	0.5	8.9
Oct 2007	184,821	0.5	8.5
Nov 2007	185,321	0.3	7.8
Dec 2007	184,398	-0.5	6.7
Jan 2008	186,045	0.9	6.4

The impact of 1%
On their own, percentages can be misleading: as prices rise, each 1% represents more money.

Today, after ten years of rapid growth, house prices are still far higher in real terms (i.e. taking inflation into account) than they were in the mid-90s.

In mid-2001, for example, when the average price stood at around £93,000, a 10% increase would have added an extra £9,300 to a house’s value. With today’s average price of £186,000, a 10% increase would be worth twice as much: £18,600.

Danger for homeowners?
The last six months have seen a lot of speculation about a ‘crash’ in house prices, based on a belief that prices are seriously over-inflated and bound to come down to a more affordable level.

It’s an unsettling thought for homeowners everywhere, even those who have already paid off all or most of their mortgage. They may be relying on their property to finance their retirement. Or, if they were thinking of consolidating their debts using a remortgage, they could suddenly have a lot less equity in their home to draw on.

Worse still, a crash could leave some homeowners owing more than their house is worth. This could prevent them from moving, as they wouldn’t be able to sell their home and repay the mortgage until house prices had risen again and / or they’d paid off enough of the mortgage to get rid of this ‘negative equity’.

Opportunity for would-be homeowners?
Would-be homeowners might be encouraged by recent housing market news. Lower prices could help them buy their own property without risking debt problems by borrowing more than they could comfortably repay.

But planning a purchase is never easy, especially as the Land Registry’s House Price Index isn’t the only one.

• The Halifax House Price Index states that prices in the UK (not just England & Wales) came down in September, October and November. They rose in December and remained quite stable in January, giving an average price of £197,244 – 4.5% higher than a year previously.
• The Nationwide House Price Index states that prices in the UK fell in November, December and January, bringing the average price to £180,473 in January – 4.2% higher than a year previously.

Different Indices work in different ways, but so far the three are pointing to reduced growth, not reduced prices. So would-be homeowners need to realise that house prices may not be growing as quickly as they were – but they’re still growing.

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