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Saturday, October 10, 2009

Fitch: UK House prices will fall another 20%

Simon Lambert, This is Money
8 October 2009

House prices will fall a further 20% once the current false dawn for a property market recovery ends, claims ratings agency Fitch.

The ratings agency has reiterated its believe that UK house prices will see a peak to fall trough of 30%, taking the average value based on then Nationwide index down to £130,000.

It forecasts a W-shaped pattern for the property market as house prices double-dip after a mini-revival.

The prediction represents another 20% drop for the property market, with average house prices standing at £162,000 on the index, having rallied from a recent low of £148,000 in February.

Prices are currently down 13% on the £186,000 peak seen in October 2007, but Fitch says UK property remains heavily overvalued and has further to fall.

'The UK's average house price to income ratio remains significantly higher than the long term average,' said Brian Coulton, Head of Global Economics at Fitch Ratings.

'A 30% fall from the peak of October 2007 would bring this ratio back in line with the long term average. In comparison, the house price declines in the recession of the early 1990's saw the average house price to income ratio fall below the long term trend.'

Fitch is the latest organisation to warn of further falls for UK house prices, following similar forecasts by property consultancy Jones Lang LaSalle, the Ernst & Young ITEM Club and the Economic and Social Research Council.

Rising unemployment, low wage inflation and continuing tight mortgage criteria are expected to further contribute to depressing the property market and house price reports returning to registering falls.

The major UK property price indices have all registered gains in recent months, with Nationwide showing prices rising six times in seven months, and Halifax reporting prices on a three-month basis rising as fast as in early 2007.

Land Registry figures, based on completed sales, have shown falls tailing off and slight monthly growth, and homebuyer mortgages have climbed steadily from a low point last winter, although they remain well below the long-term average.

Fitch says that despite the recent signs of life attractive mortgage deals for those with deposits of less than 20% remain scarce and lenders it has spoken to have also reported tightening other criteria when vetting potential borrowers.

It added that if mortgage availability stabilises at current deposit requirement limits, then with an average home costing £162,000, a first-time buyer would need £32,000 in cash to buy a house. A homemover would require this amount in deposit and equity.

The figure remains resolutely high when compared to the typical pre-tax salary of £25,000, according to the Office of National Statistics. However, Council of Mortgage Lenders figures show that the average homemover individual or joint salary is £45,500 and has stood at about £40,000 since 2006, while the average first-time buyer individual or joint salary is £32,500, and has stood at between £30,000 and £35,000 since mid-2004.

Alastair Bigley, Head of UK Residential Mortgage Backed Securities at Fitch, says: 'Despite the fact that a global economic recovery is underway, the economic fundamentals do not auger well for a sustained strong recovery in the UK housing market.

'Although households are reducing debt and increasing savings, the upfront cost of house purchase for first-time buyers is likely to stifle housing demand.'

Nationwide House Prices Sept 1999 to Sept 2009

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