The Sunday Times
(January 02, 2005 )

House prices poised for first annual fall in a decade

Property values could drop by up to 8% this year, raising fears
that buy-to-let investors will quit the market


HOMEOWNERS are being warned that house prices could fall this year for the first time in a decade.

Even where experts are predicting continued rises, growth is expected to be lacklustre. This has raised fears that many buy-to-let investors will sell up. Research from Savills Private Finance, a broker, found that 61% of landlords were investing for capital growth rather than income.

Halifax, Britain’s biggest mortgage lender, forecasts that property values will slip by an average of 2% in 2005. It would be the first annual drop since 1995, when prices fell by 1.5%.

Martin Ellis, Halifax’s chief economist, said: “House prices have now been rising for nine years and the average home has gone up by almost £100,000, or 160%. Following such strong gains, homes are no longer affordable for many people, particularly first-time buyers, and they are staying away from the market. This will contribute to modest price falls this year.”

House prices are currently 5.74 times average earnings, according to Halifax — an all-time high and well above the long-term trend of about 3.5 to 4 times earnings.

Some experts are predicting even bigger declines in house prices. Christopher Smallwood, chief economic adviser to Barclays, thinks prices could drop by 8%.

Capital Economics, a consultancy, believes property values will drop by 20% over the next two years, with a 7% fall in 2005.

However, others think house-price growth will slow down sharply, rather than crash.

Last week, Nationwide said that prices fell 0.2% in December, but the building society expects property values to rise by an average of 2% this year. Abbey is also predicting growth of 2%; the Council of Mortgage Lenders has a forecast of 4%.

David Pannell of Durlacher, an investment bank, fears the slowdown will prompt a rush to sell. He said: “House-price growth could be close to zero for six or seven years as earnings catch up with house prices. We believe that, as a result, many amateur buy-to-let investors will be tempted to take profits.”

Geoff Marsh of London Residential Research said: “Buy-to-let investment was a no-brainer until recently; you could buy anything, anywhere, and the market would make the money for you. Now you have to be a savvy investor and buy in the right locations where there is a limited supply of new homes. The buy-to-let market is not dead, but it is going to become more difficult to make money