2011 falls likely as new sellers drop prices 3%

At best prices will be flat, but a drop by as much as 5% is predicted if sorely stretched lender forbearance buckles as prices fall and repossession numbers jump as a consequence.

Rightmove’s December House Price Index saw price falls on a national average basis of up to 5% are relatively minor – indeed, national average asking prices are 6.5% lower this month than they were in June. However, in areas of over-supply and where forced sales are more prevalent, a more extreme re-adjustment of sellers’ price expectations will be necessary. These are likely to be more concentrated in the north of the country.

The key elements of the Rightmove 2011 forecast are:

– Properties coming to market falling to circa 1.2 million, down around 10% on 2010. Some would-be sellers will postpone their marketing decisions until price growth returns and helps them to achieve their price aspirations. While numbers will be buoyed by those who simply can’t delay their move any longer, they will be depressed as potential trader-uppers discover that they are equity poor and not able to raise the mortgage finance to compensate. The job secure equity blessed trader-uppers who are looking for more space and value will have good choice and bargaining power on run of the mill properties, though individual homes in popular locations will remain in demand and in short supply.

– Transaction levels of around 600,000, continuing to run at circa 50% below historic norms for the second consecutive year. The proportion of transactions that are repossession sales is currently running at around 1 in 15. There is evidence of growing pent-up buyer demand and an increased number of forced sellers would give them more bargain hunting opportunities. However growth in transaction numbers will continue to be thwarted in 2011 by a continuation of elitist mortgage lending criteria. Rightmove expect to see a slight lowering of hurdles in the second half of the year if lenders
are falling short of their 2011 lending targets.

– National average asking prices are forecast to fall by up to 5% during 2011 if repossessions increase substantially. Should lender forbearance continue to limit repossessions then prices could end the year closer to the price standstill Rightmove has recorded in 2010. Lower prices will further assist the affordability of deposit rich first-time buyers and yields of active buy-to-let landlords. Equity blessed trader uppers are relatively unaffected as any price falls on their property can in theory be passed up the chain. Those sellers exiting the market would be worse off and will have to price more aggressively if their property type is commonly available and in a less popular location.

Miles Shipside, director of Rightmove comments:

“In 2011 we will see larger falls in weaker markets due to over-supply and forced sales. Conversely, pockets of the country where demand remains credit crunch resistant and supply is traditionally low will see prices underpinned and somewhat immune from the falls in other areas. The fact that many would-be buyers do not have the ability to proceed, and some homeowners may find themselves in a position where they are forced to sell, drives prices down. These negative factors are likely to outweigh the positive price pressures of pent-up demand for housing and a price under-pinning shortage of quality homes in popular locations. This makes forecasting more of a lottery than usual, though the net result is likely to see average national asking prices fall slightly. At best they could be close to flat and at worst down by 5% if repossession numbers jump up from 1 in every 15 sales”.

Repossession numbers are expected to be under 40,000 this year, well below original estimates of 53,000.

Whilst a relatively small percentage of the 1.3 million properties recorded coming to market in 2010 by Rightmove, the difference is they are naturally priced lower than less motivated sellers. They have to sell, and, in sufficient numbers, will substantially decrease prices as other local sellers have to follow suit to be competitive. The forbearance that has been so far shown to some of the 175,000 who currently have arrears of 2.5% or more of their outstanding balance will be under increasing pressure if these balances, and the number themselves, continue to grow. In the climate of more stable property prices enjoyed until recently, lenders took a more benign view. Recent price falls and some nervousness about prices in 2011, combined with growing arrears, could lead to lenders deciding it is in their best interests, and those of
debtors, to go down the repossession route. If base rates increase then repossession numbers could form a much larger percentage of total sales, and at an extreme this could lead to even greater price falls than forecast.

Shipside comments:

“Existing unemployment black spots and local markets facing the threat of significant  redundancies will be worst hit by any increase in forced sales. Areas such as the north-east and north-west of England could be the most vulnerable, with property prices taking a larger than average hit. There will be opportunities for buy-to-let investors and the equity rich, which in turn will underpin prices and return more activity to the market. We witnessed this in early 2009 when rental yields struck a return too good to turn down and value to owner occupiers had re-adjusted to tempting levels. It is important that base rates remain very low to aid recovery”.

The forecast for 2011 comes against a backdrop of falls in five of the last six months. This is the second largest fall ever recorded in the month of December, and the biggest reverse for three years since the Lehmann-induced 3.2% drop in December 2007. This re-adjustment means that average asking prices have, after a year of contrasting halves, remained at a virtual standstill at just 0.4% above where they were a  year ago. This ties in with the December 2009 forecast of flat prices for 2010. While we are likely to see the traditional spring bounce in prices this cannot compete for long with economic fundamentals, and the winner in 2011 is likely to be restricted buyer demand leading to slight but continuing downward price pressure. The number of new properties coming to market is likely to be about 40% below historic norms.

An early sign of new listings falling away is seen in this December’s new-to-market properties being almost identical to last year (+0.1%). With the suspension of Home Information Packs, one would expect the ranks of speculative sellers to have swelled significantly since last December. This supports our expectation that for many would-be sellers the sums simply won’t stack up to allow them to market during 2011. There is also some evidence of this in average unsold stock per estate agency branch, which has fallen from 77 to 74.

Understandably picky buyers will choose the better properties in the better locations, leading to similar quality stock shortages that were experienced in 2009. This is likely to underpin prices in the south, with London proving to be the most resilient region. The shortage in popular areas will be exacerbated as existing owners will decline to move due to lack of choice, as well as financial restrictions hindering their ability to trade up. The chronic lack of new build activity will also limit new supply.

Shipside comments: “Trader-uppers have been denied their usual price gains over the last few years, and their lack of equity growth will be compounded by lenders unwillingness to fund their five-yearly move. These regular movers of yester-year will be unable to come to market, and are likely to be joined in their impasse by those that can afford to trade up but are reluctant to market as they see very few properties with the wow factor. The pent-up demand for housing will be fit to burst its banks if and when lenders return to funding the needs of growing families and growth in household numbers. For 2011 that is not going to happen, and it could take as long as 2015 before transaction levels become relatively meaningful when compared to previous norms”.

Agents currently report mortgage funds remain difficult to arrange following a further tightening in lending criteria in the middle of 2010. We cannot foresee a set of circumstances that would promote an increase in transaction numbers in 2011 beyond the 550,000 to 650,000 range the market is currently operating in.

Should lenders begin to fall short of their targets during the first half of 2011, we could see increased competition leading to slightly more relaxed mortgage lending in the second half of 2011, a trend that will  hopefully continue into 2012 and beyond. Competition is a vital element of mortgage availability as it delivers competitive rates like those seen during the excess growth of the credit markets we are struggling to recover from. With interest rates likely to rise in 2012, more competitive mortgage deals will be essential to offset the rise in base rates and prevent a further frustration of buyer demand and housing market recovery.

Shipside adds: “In spite of economic woes, un-seasonally high numbers of searches on the Rightmove website show that prospective buyers are still looking, perhaps watching and waiting for the right buy to whet their appetite and fit their pocket. Sellers are going to have to price more competitively in 2011, though it takes time for that message to get through in the absence of another banking crisis. We cannot see conditions on the immediate horizon that would cause a significant fall in prices unless the credit crunch tightens. A continuing drift of a few per cent similar to what we have seen in the latter part of 2010 is likely in 2011 until the economic recovery gathers real pace. This would mean that prices could well be around 10% lower than the mid-point of 2010, helping overall buyer affordability and housing market recovery”.

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