The plus side of falling house prices

16 May 2008

Panic is occurring in the property markets. After a decade and more of spectacular growth, the inevitable is currently happening. Price growth is slowing and, in some areas of the UK, house prices are starting to fall.

One report by Experian suggested a 7.6 per cent fall in prices over the next two years.

But with many homes out of financial reach of a vast majority of the public, are falling house prices necessarily a bad thing?

A recent BBC poll found that more people across the UK want house prices to fall than rise. Rapid growth over the last few years has prices many potential buyers out of the market, with only 19 per cent wanting prices to continue growing.

The study found that 28 per cent of people want house prices to fall in order to be able to move from their current home.

According to the research, the vast majority of these were first-time buyers, who have been the major victims in the property sector`s rapid success.

Between 1997 and 2007, the price of an average first-time property rose from £52,674 to £159,494, according to the charity Shelter. Such a rapid rise has left many unable to afford a home and having to rent instead.

While the rental sector has been booming as a result, the lack of affordable houses has gradually slowed the market down, with no new money entering the system. Combined with the credit crunch and global financial uncertainty, house prices have started to slow and even fall.

Prime minister Gordon Brown has announced plans for shared ownership schemes for first-time buyers earning less than £60,000 a year. It is a sign that the government knows there is a problem.

House price falls are not generally welcomed by economists and financial experts. In February Kate Barker, a member of the Bank of England`s monetary policy committee, warned that a downward spiral in house prices and a drop in mortgage lending are the biggest threats to the UK economy.

"The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil," she said.

Mortgage lending is slowing. Recent figures from the Council of Mortgage Lenders found that monthly mortgage requests had fallen to their lowest total since 1975.

A study by Moneyfacts found: "With falling house prices and borrowers finding it harder and harder to get a new deal, the lenders` standard variable rates are becoming a more attractive option, but these lenders do not want to take on the more risky borrowers who do not have enough equity in their home to get a good deal."

The situation goes full circle. The solution to the problem is a period of uncertainty, where the market can correct itself and make itself more affordable to the people who need it the most.

It may be painful in the short-term, but house price falls aren`t all bad.

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