House prices face double dip

Last year saw a surprise 'boomlet' in the market – but now a second credit crunch that could send property values into a new tailspin is looming. Graham Norwood reports

The Radio 4 panel game The Unbelievable Truth challenges you to spot a correct statement in a litany of truthful-sounding falsehoods. Anyone wanting an accurate snapshot of the housing market right now is advised to take the same approach.

True, a house in London's Ladbroke Grave had 43 viewings on its first day on the market says estate agency Marsh & Parsons. True, Barratt Homes sold three new homes in Aylesbury off-plan for £500,000 each, just one week after offering them for sale. And true, latest government figures show British house prices actually rose 2.9 per cent in 2009.

So surely prices are rising, demand is on the up and the market at last returning to pre-recession normality, right? Wrong, for five reasons.

1. Demand is weaker than it appears and may drop

Mortgage data (lending sank to an eight-and-a-half-year low last month, according to the British Bankers Association) shows much of the demand for loans in late 2009 came from first-time buyers rushing to beat the government's stamp duty "holiday" ending on 1 January, debunking analysts who thought it heralded a full-blown recovery.

Unsurprisingly, therefore, the Royal Institution of Chartered Surveyors' latest survey of members shows 20 per cent more reporting a fall in new buyers registering with agents in January than those reporting a rise.

Similar findings come from Hometrack, a housing consultancy, which says January saw a decline both in new sales agreed and in buyer registrations.

Now experts say demand will drop leading up to the election. "There's a potential risk of the housing marketing grinding to something of a halt," says Nick Salmon, commercial director of estate agent Harrison Murray.

2. Most recent price surges are in wealthy areas

In January, prices rose only in relatively high-priced Greater London, South- east and South-west England – the rest of England and Wales remained static. This skew "has led to the general health of the housing market being overstated especially when set against the backdrop of an economy emerging from recession" according to Hometrack research director Richard Donnell. "There may be a fall-back soon," insists Yolande Barnes of estate agent Savills. She supports the so-called "Dead Cat Bounce" theory – that prices fell in 2008 and 2009, have briefly risen recently but will drop again. She predicts a fall of 6.6 per cent in 2010. "Mortgage availability will remain constrained and wider economic indicators are still very volatile. These do not provide a context for rapid market growth," she adds.

3. The buy-to-let sector has not escaped the slump unscathed

Buy-to-let (BTL) has fared better than many expected. There were 25,800 loans to landlords to buy new investment properties in the final quarter of 2009 – up from 23,700 in the previous quarter – and very few landlords have had to sell their portfolios.

"But that's because interest rates have been very low. It may be a different story when interest rates rise later in the year and if the economy changes after the election," warns TV property expert Sarah Beeny.

Although the rental sector looks strong in the very long-term (owner- occupation is actually falling slightly, in favour of renting) and rents are rising again the current BTL market looks fragile.

In 2009 as a whole, notwithstanding the autumn surge, there was a 58 per cent drop in BTL mortgages loaned, compared to 2008 – which was itself a very poor year. Bradford & Bingley, Northern Rock and HBOS say default rates on BTL loans have risen more steeply than on owner-occupier mortgages.

4. The post-election landscape may weaken the housing market

The popular consensus that tax rises and spending cuts will prevail in the second half of 2010 makes an unlikely backdrop for a supposedly-booming housing market.

Savills say 24 per cent of properties, marketed by its nine offices in the north of England, are bought by public sector workers. "That client base may well be vulnerable if a new government clamps down on public spending," says the firm's Chris Charlton.

Any spending cuts will come just as the second round of the credit crunch begins next winter. From January 2011 banks are obliged to start repaying £319bn borrowed from the government during the downturn in 2007 and 2008, with the balance to be repaid by 2014.

So unless there is remarkable economic growth, expect banks to find the money by making fewer loans to home buyers and charging more for them, for several years to come.

5. Estate agents are no longer the only market barometer

About 6,000 homes are on Sarah Beeny's new Tepilo.com, the latest website for vendors to advertise homes for sale for free. This already makes it more successful than most previous bids to break estate agents' monopoly on sales. Now more are on their way and supermarket giant Tesco is expected to launch a property website within weeks.

"All buyers now begin their search online which is why agents have large websites. But for a £350,000 home they'll charge £10,000 commission, so put up the details and the photographs yourself and spend the money on a holiday," says Beeny.

The market importance of the revolution that Beeny is spearheading is that more homes now than ever before are sold in ways missed by establishment indices like Rightmove and Hometrack, which rely on estate agents' information. Expect this trend to develop this year, making some traditional indices less reliable than before.

The reckoning

While few commentators openly forecast a doomsday scenario of sharply falling prices, most believe the New Year froth and frenzy will morph into a much more fragile market with falling prices. Forget what the property spin doctors say; look beyond today's headlines. And there lies The Unbelievable Truth.