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Clare Francis: House prices have fallen significantly over the past year and much of the reason for the weakness in the market has been put down to the fact mortgages are hard to come by, particularly those with small deposits, so this is precluding first time buyers from getting onto the property ladder.
However, the Bank of England has cut interest rates again and it's launched a new strategy which is designed to pump money into the markets to get banks and building societies lending again. So is this going to work and are we going to see the market pick up again, or could house prices fall further?
Well, you may remember last Autumn I spoke to Fionnuala Earley, who is the chief economist at Nationwide building society. She is here again with me today just to get her views on the market and what lies ahead.
Q1: Fionnuala obviously your latest house price figures show that the average price fell by 1.8% in February and they are 17.6% lower on average then this time a year ago. How much further could they fall again do you think?
Fionnuala Earley: Well that's a really hard question to answer because we are in a period of quite a lot of economic instability, not just in the UK but across the world, and of course we're in a global economy now so things outside affect us.
But I think it's quite clear that we will expect to see prices continuing to fall throughout 2009, but as prices do fall then affordability does improve and it starts to encourage a little bit of interest even if people aren't quite ready yet to actually transact.
Q2: Because we are beginning to see signs that interest maybe reappearing already because I know that recently quite a few of the reports from estate agents have said that they are seeing an increased number of potential buyers coming to look at property - obviously with prices already having fallen a lot of people might think now is a good time to buy - but they are not transacting. Why do you think that is the case, is it because of the ongoing problems with the mortgage market?
FE: I think there are a number of factors really behind this. I think what actually happened when we had the 'squeeze' if you like back in November 2007, and a further squeeze in the Autumn of 2008 with Lehmans, we found people sort of pulling back from the market and credit was quite tight except for credit-worthy borrowers, and people became very cautious about what was happening. And of course the peoples' expectation to whereabouts house prices are going are very important here as well and people still expect prices to fall.
So what I think we're seeing now with the buyer enquiries is that people are curious. They're looking at properties now that have fallen in price - 'what can I afford? Hang on, they might go down a bit further - I'm not actually going to actively move yet' - but they're starting to think about it, so I think the change in affordability is affecting the curiosity.
Q3: But one of the big things that seems to be a real hurdle and stumbling block stopping the market from picking up again is the fact that it is still really difficult for first time buyers to get a mortgage. They might be able to afford to buy a property now because of house price falls but because most mortgage lenders are still requiring deposits of at least 25% - if you only have a 10% deposit or something, it is still very difficult to get a loan isn't it? Is that having a big impact?
FE: Well I think there are loans out there at higher percentage values than 75%, but obviously they're a little bit more expensive in the interest rate that's offered.
But I do think it's very difficult to disentangle what is the availability of finance and what is actually the demand, because I think we're seeing both happening - particularly on the house purchase side of the market - that there's a demand evaporating partly because expectations and also because people are feeling less secure about their jobs at the moment. We've seen lots of increases in unemployment already and probably as the economy goes into recession further then we'll expect to see a little bit of a pick-up there, so that will really affect their demand and perhaps supply isn't the driving factor as perhaps it was maybe at the very beginning of all this.
Q4: I know historically one of the things you have said has helped underpin the market has been strong employment. Obviously with unemployment now rising, and as you said a lot of people are nervous about their jobs even if they haven't been affected so far, what's the longer term impact of that likely to be?
I mean could that mean that the housing market here in the UK is subdued and affected for years to come, because we are being warned that it will take a long time to recover?
FE: Yes, I mean I think you can never take the housing market and the economy and split them up completely. I think this is exactly right, the labour market has an important part to play in that, as much do with confidence as with anything else so I think that's partly behind why we expect prices to continue to fall this year as people are a bit more cautious.
But there is one other factor that's happening this time round that certainly didn't happen in the 1990's and that's interest rates have fallen so much further, so that really makes it much easier for those people who are on reduced incomes who already have mortgages and have a variable rate, that makes it much easier for them to pay their loans, and also for people who might be wanting to enter the market because it's cheaper than it has been - that may be a mitigating factor there too.
Q5: How long do you think interest rates can stay this low, because obviously we have had another rate cut in March and rates are now at half a percent? I don't know what you think, but a lot of economists now think that we probably won't see any further cuts but rates will stay at this level, but how long will it be before they start to go up again?
FE: I think it's true, I don't think we'll see rates cut any further, partly because the pressure on savers then is getting difficult now, they couldn't cut them any further, and of course we've got quantitative easing to try to stimulate things, but we do think that rates will stay low - we think they'll probably stay around 0.5% certainly for the rest of this year.
Q6: You mentioned quantitative easing - obviously that is the new strategy used by the bank - do you think that it's going to work?
FE: Well, I think in theory it should work. It depends on how quickly the banks begin to build trust again and how quickly they're willing to lend out, and it seems to be perhaps there is some more appetite for that. There's certainly pressure for that both politically and demand for it from companies in particular as well.
But we have to be clear about this, we don't want to get into the situation where people who can't afford to pay back their loans are given loans - it has to be a sensible risk-based decision.
Q7: If it does work, and if we do see banks and building societies in a position where they can lend more, do you think that will help the outlook for the housing market, in that if mortgages are more readily available it might help?
FE: Well all of those things are true - if interest rates are relatively low, then they're a big part of the cost of loans and that will help to encourage demand, particularly for those people perhaps who've stayed out of the market just now because they've been waiting for prices to fall. It may encourage some of them to go back in. But it's not the only factor that's relevant really.
Q8: How long do you think it will take for the market to recover? Because obviously one of the problems at the moment is because prices have fallen, and because you could borrow 95%, 100% or even more than the properties value, we are seeing an increasing number of people in negative equity (where the outstanding mortgage is worth more then the property at the moment). How long do you think it will take for the market to recover so that those people are in positive territory again?
FE: I mean again that's a very difficult question to answer, because the current crisis hit us and we didn't expect that to happen so equally something else positive could happen that pushes things up very much more quickly.
There is still that supply issue, we know that housing starts have fallen off a cliff and so the underlying supply issue in the UK is still there, and when the confidence does come back that could mean that prices could begin to push up rather rapidly, and also the demographics of the country mean that those people who are at the age where they want to be setting up home is there ready to move, so that could push things up quite rapidly, but its very difficult to put a timing on that really, and I certainly don't think its going to be something that will happen rapidly - certainly not during 2009.
Q9: I mean if we are talking 5, 10, 15 years? The property market in the UK, its still [unpredictable], so people shouldn't be overly nervous about owning property?
FE: No, I don't think so. I mean it depends what you're buying your property for! Most people of course are buying properties to live in and they're moving house because their jobs moved, their families growing, or they're trading down at the end of their housing lifetime as it were. So it's got a residual factor, its there for somewhere to be a home - it's not just a speculative investment.
CF: Thank you Fionnuala.
FE: It's a pleasure.