As house prices continue to drop, the property market looks like it is headed into the worst disaster since the crash of the early 1990s. In May alone, housing prices fell by 2.5 per cent, or approximately £5000 per home, which is the largest monthly fall since January of 1991. May was the seventh consecutive month of price decline, rounding off a 4.4 percent decline in prices from this time last year. This is the longest consecutive period of decline since 1992. If this decline continues throughout the year, housing prices could be down about 13 per cent by the end of the year. The decline in house prices has been fuelled by a number of factors, the most prominent being the tightened lending conditions and limited buyer affordability.
After the housing boom of the last decade, house prices are still fairly high, and first time buyers are encountering increased difficulty in finding home mortgage loans. Both of these facts mean it is increasingly difficult for the average first time buyer to afford a new home. Without a respite from these problematic factors, prices will continue to decline well into 2009.
Despite the falling house prices, first time buyers are having extreme difficulty finding homes they can afford partly because of the national credit crunch. Coupled with rising petrol and energy prices, it has become more and more difficult to afford a home. Furthermore, the current inflation rate of 3 per cent is predicted to reach even 4 per cent by the next month, due to such factors as record high oil prices. The Bank of England is therefore reluctant to cut interest rates with the inflation rate so much greater than the 2 per cent objective. All of the major lenders have reported massive falls in mortgage lending and sales, meaning the housing market is not likely to improve anytime soon.
It is difficult to say exactly what is in store for the future, although there is fairly universal consensus that housing prices will continue to drop significantly into 2009 and perhaps beyond. As the credit crunch could potentially last another two or three years, the pricing situation in 2009 is difficult to predict. If the credit crunch does continue, it is likely that the Bank of England will try to cut interest rates in the hopes of stimulating the market, especially for first time buyers.