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Will the housing downturn continue to accelerate in 2009?

publication date: Nov 10, 2008
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Michael BallWithout evidence that lenders are prepared to increase lending, the scale of the housing market downturn is likely to accelerate in 2009, according to new research commissioned by the National Federation of Property Professionals, NFOPP, for the NAEA and published on 5 November. 

This is the second part of “The Modern UK Housing Market: Origins and Prospects” by Michael Ball, Professor of Urban and Property Economics, Department of Real Estate and Planning, University of Reading. 

The report points out that the crisis affecting the housing market is without precedent and there is no knowing how far the market will fall unless something is done about it quickly. The scale of the reduction in mortgage credit is so great that few can buy. More sellers will be forced into the market and increasingly they will need to cut prices. Many will not find buyers because too few in the market to buy will be able to get mortgage finance. 

The report argues that the whole of the housing market needs kick-starting. Emphasis should not be limited to specific slices of it. To this end it puts the need for: 

  • Substantial cuts in interest rates, which would improve affordability and stem repossessions.
  • Strong new measures to increase the volume of mortgage lending substantially.
  • Temporary government guarantees for the top slice of mortgages, both for firsttime buyers and others; l Further, more extensive, temporary action on stamp duty. 

There is a real threat of a downward spiral for house prices, falling mortgage availability and a long-lasting depressed market. The state of UK housing is, in some respects, is worse than that of the US, where it is concentrated into a few problems areas. 

Here, the mortgage freeze affects the whole of the UK market. The knock-on effects into the rest of the economy will help to push up repossessions, adding further to market woes. 

Recovery would be fast if it were allowed to happen 

Commented Peter Bolton King, Chief Executive of NFOPP:
 “Investment landlords, the overall shortage of housing supply and the numbers now believed to be renting but waiting to buy, all suggest that recovery would be fast if it were allowed to happen. However, prospects for the housing market look grim. The Government and the Bank of England need to take the situation extremely seriously,” he warned. 

The report argues this point strongly. There is substantial suppressed demand. Renters are holding off from house purchase and investors are waiting for bargains. The long-term prospects of severe housing shortages in the UK mean that, with a recovery, prices will recover rapidly as long as financial markets are in good shape. 

Before that, however, the initial optimism that lending would increase following the autumn financial measures appears to have evaporated. Even with substantial falls in interest rates, it is by no means clear that mortgage availability will improve and without that there is no hope of recovery. 

“The Modern UK Housing Market: Origins and Prospects” covers a wide variety of issues related to the housing market – how the UK housing market evolved; housing supply; the growth of housing wealth and borrowing; expansion of the private rented sector; origins of the current situation; and long-term housing market prospects. For example, the report shows that UK building rates are the lowest among the major economies for population size. 

It also shows that dwellings represent 43% of the country’s net capital stock and 60% of asset wealth. The market value of residential stock in 2006 was £4,000 Billion. This wealth is concentrated in southern England and amongst the older age groups. 

Professor Ball’s report examines the great tenure shift away from renting that characterised every decade of the twentieth century. Now, it concludes, this has probably come to an end. Home ownership cannot expand much more because of affordability issues and the distribution of wealth and income. However, it notes that the proportion of households moving has hardly changed since the 1980, at around a tenth. 

This leads to the conclusion that the UK has not changed to become a more residentially mobile society. Instead, it appears that, over the past twenty years, a larger share of the more mobile people is being attracted to modern private renting. These people tend to be younger adults. 

The report concludes that the UK’s notorious boom-bust housing market is a result of the long-term lack of supply. This supply problem will set the broad framework of future housing market developments. Meanwhile, housing shortages will impose costs on everyone, restrict household growth and force many to crowd together when they would rather live in smaller households. 

The full report “The Modern UK Housing Market: Origins and Prospects” by Professor Michael Ball is in two parts. Part One, published in July covered private rented housing. Both sections can be downloaded from: