Three of the last seven months of data from Nationwide have been down and four up. The latest data from the Halifax show four down months and only two up. So what is going on? First, these data are seasonally adjusted by both the Halifax and the Nationwide. That is to account for the fact that there are regular monthly patterns every year. This is a problem now as patterns in the past when house prices were rising aren't very helpful in a period of falling prices. Second, estimates of monthly house price changes aren't very accurate when the number of house sales are small, so you get lots of variation in prices each month. Over the period June 1989 to July 1995, for example, when average house prices fell from £70,095 to £60,965 there were 23 months where prices increased and three where they were flat and 48 when they fell. How much further will house prices fall? The best guide is the ratio between average earnings and average house prices. This is a measure of affordability. Between 1983 and 2001, before house prices started to climb, the ratio averaged 3.62. By July 2007 the ratio had reached 5.84; it has subsequently fallen back to 4.33. To get back to the long-run average of 3.62 from 5.84 implies a drop of 38pc. So far we are down 26pc, so it looks like there is more to go. The possibility is that house price falls will be even greater than that if the ratio falls below its long-run trend before recovering, as it did in the early 1990s. House prices probably have a good way to drop yet. Lots of people may tell you otherwise − estate agents, mortgage brokers and bankers − because they have something to gain. My advice is just to look at the data.House prices are still falling
It may be true that the path to true love does not always run smooth. That is also true of house price declines. Last week the Nationwide reported that house prices rose by 1.3pc in July. Great, the slump in house prices is over. Actually, probably not.
Sunday, 2 August 2009
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