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Clare Francis: I'm with Martin Ellis today, who's the Chief Economist at Halifax, to talk about the nation's favourite obsession - house prices. After a decade-long housing boom the housing market is slowing but there are growing fears that the slowdown may be sharper then many people were expecting, and that we could possibly be even on for a full scale crash.
Q1: So Martin, what is happening with the housing market? Your latest figures reveal that prices fell by an average of 1.3% in April, could things be worse than you were expecting?
Martin Ellis: You're right - we've seen a fall in April, we've seen a series of house price falls in the last few months and actually going back to last August. We've now seen prices come down by a few percent, and it's right to say that this is in the context of a very big rise in house prices over the last decade.
House prices on average in the UK have nearly trebled in that time so I think it's almost inevitable that that couldn't continue, and at some point we were going to see something of a correction and we think that's what's going on at the moment, and we think that here's a bit further to go - we think that house prices will decline further and over the course of 2008 and 2009 we're predicting there will be single-digit falls in house prices. Now we haven't put any precise numbers on that but we're thinking in terms of mid single-digit falls.
Q2: Could the slow down be worse then you're forecasting? You have recently revised your predictions for growth this year, as has the council of mortgage lenders which is now forecasting falls of 7%, and leaked government figures suggest that's a sort of best case scenario - falls of between 5 and 10% - and it might even be worse then that with some analysts believing we could be in for falls of 20 to 30%. Is that a real possibility or is that overstated?
Martin Ellis: We think that is overstating it. We think that the most likely case is that it will be a sort of modest slowdown taking place, and the sort of declines which we are expecting which are somewhat more moderate than what the more gloomy forecasts, and that will happen during 2008/2009.
But there are some big differences between what's happening to the market and how well underpinned the market is now, compared to what happened, for example, at the crash in the early 1990's, when actually there were some very fundamental problems with the economy, and inflation was very much higher at that time - it actually went into double figures, interest rates had to be raised sharply and we did see interest rates actually double over a very short period (just over a year) - and the economy went into recession and we had big rises in unemployment.
Now, although the economy is weakening and there's more talk about inflation now, it's still not on the scale that we saw during that period, so we believe the economy is going to remain in better shape and that will help the housing market and that means that the declines should be more modest this time around.
Q3: How important is consumer confidence? Obviously the economic fundamentals might suggest that the housing market is well underpinned, but there is a lot of nervousness around at the moment and people don't want to buy if they think that the price of the property may be lower in one or two years time, and because of the credit crunch and the fact that its harder to get mortgages and loans at the moment, even those who would be willing to transact maybe unable to because they cant get a big enough mortgage. Could consumer confidence, or lack of it, tip the balance and make the slowdown worse then everybody is predicting?
Martin Ellis: I think consumer confidence is an important factor and I think that's why the market has certainly weakened more over the last few months than we'd expected. Yes, there are concerns about what's happening in the market, but more importantly I think there are general concerns about what's happening globally in economic terms and what's happening to the UK economy.
There's a great deal more uncertainty about economic and therefore personal sort of financial prospects than there has been for some time, and that is having an impact, and it's sort of adding to the sort of pressures which households are already facing. Yes, we know about big increases in fuel prices, bigger rises in food prices - they're all putting pressure on household finances - and that is part of the reason why the housing market is going into this downturn and why we are seeing these falls in house prices.
Q4: And what about interest rates? We have obviously seen three interest rate cuts between December and April and many analysts had been expecting further rate cuts this year, but the latest inflation figures and comments from the Bank of England suggest that may not be the case. With inflation at 3%, the Governor of the Bank of England has warned house holds not to expect significant rate cuts, do you think that's it for interest rates or could we see further falls, because obviously some house holds will be banking on that to bring their mortgage costs down?
Martin Ellis: I think we probably will but I think its going to be somewhat later in the year. I think various reports which have come out from the Bank of England very clearly showing that the Monetary Policy Committee's (MPC) focus is very much on inflation and keeping inflation under control, and that's going to be very much their priority.
I think what that's going to mean is that we're not likely to see further cuts in interest rates anytime soon unless we start to get some much weaker figures in terms of the economy coming through, and yes we are seeing a slowdown in the UK economy but we're not seeing anything which I thinks causing undue concern at the Bank of England, but they've always said well actually they need the economy to slow, so this is really what they want to do to contain inflationary pressures.
So no, don't expect further cuts in the interest rates over the next two or three months but I think later in the year when there's more concrete evidence that actually the economy is slowing fairly sharply that that will encourage them and actually give them some more leeway because it will make them a little bit less concerned about inflation in the medium-term, and that will allow them to trim interest rates.
Q5: So its not total doom and gloom then, but people should prepare themselves for a tougher ride over the next few years?
Martin Ellis: I think that's right yes, we've had a very good decade and the Governor of the Bank of England likes to call it the 'nice decade' where we've had a very good sort of last 10 years - the economy has done very well, it's grown continuously, often at fairly good rates; inflation has been low, it's been steady, and interest rates have been very low as well.
The tide is certainly turning, and the position over the next few years is going to be somewhat more choppy than we've seen in the last few years, and that does mean I think it's going to be tough in the next year or two in the housing market. But no, we're not 'doom and gloom' about this, but it is going to be a much more subdued picture, we do expect some modest falls in house prices and we do expect the level of house sales to be much lower than we've been used to.
Clare Francis: Brilliant, thank you Martin. Thanks for your time.
Martin Ellis: Thank you.
