Rightmove index reveals further house price drop

Amanda Jarvis

November 22, 2004

– Average asking prices fall £3,200, the second largest drop of the year, on top of August’s decline of over £4,000 or 2%
– Further falls in asking prices expected over the next two months as the slowdown hits all regions and the market searches for a new level of sustainable pricing
– With 40% more properties available than in January and stable interest rates, confident buyers have a great opportunity to do a good deal
– Compiled from measuring 88,743 asking prices of actual properties put on sale by estate agents from 10th Oct to 13th Nov 2004 – representing approximately half the market

This month’s Index provides evidence of a significant downward correction in house prices, as the market recognises that prices had become too high and that affordability had been stretched too far. Sellers have finally responded by cutting asking prices in order to tempt buyers back.
The 1.7% average fall in asking prices this month combined with the 2% fall in August suggests a rather greater correction is on the way than has been reported by the big lenders to date: their latest figures based on mortgage offers have only just started to report their first significant falls… Halifax Bank of Scotland is minus 1.1%, Nationwide minus 0.4% (for October) and the ODPM (minus 0.1% for September). This reflects the forward-looking nature of Rightmove’s figures, which is compiled from the asking prices of properties as they are put on the market via estate agents. The data we report today will be reflected by other indices in the future as and when mortgage offers are made.

Sellers are starting to recognise that a much more realistic valuation of their properties is needed to achieve a sale. This month sees a large £3,200 or 1.7% fall in the average asking price, which drops from £193,536 to £190,329. This follows an unexpected slight 0.6% rise in asking prices last month, as sellers failed to appreciate fully that pricing had become unsustainable and continued to put properties on the market at unrealistic prices.

Rightmove’s commercial director Miles Shipside comments: “This month we are seeing a big fall as sellers and their estate agents adjust asking prices in a quest to rekindle buyer interest. It’s the third biggest drop we’ve seen since we started our Index and reflects the fact that prices had become too high in most parts of the country.”
“The readjustment phase began in late July and August, when sellers began to respond to the slowing summer market by chopping over £4,000 off average asking prices. However, the market remained sluggish even once the holiday period was over, and the summer price reductions were not sufficient to spur renewed activity. Perhaps surprisingly, the autumn heralded a ‘false dawn’ as prices bottomed out in September and began to creep up again in October, with sellers mistakenly thinking that low interest rates and a benign economic environment would encourage people to buy.”

“However, prospective purchasers have become increasingly reticent to commit, or quite simply unable to afford the price at which properties were marketed. Now we’re seeing a natural adjustment as sellers plumb the depths and are forced to drop asking prices again. We’re going to see a couple of painful months for sellers as the market finds a level at which buyers are confident again.” “It may be ugly for a month or two, but a bit of turbulence is inevitable on the approach to the much hoped for ‘soft landing’.”

The annual rate of growth in asking prices has continued to follow a downward trend, falling for the third time in the past four months. This month’s rate was 11.6%, down from 13.4% in October and 16.4% in September.

Continues Miles Shipside: “The annual rate of house price inflation is now falling more sharply than it has for several months. There’s been a steady downward trend, since this year’s peak of 18% recorded in July. With further price falls to be expected next month as Christmas approaches, we’d expect to see the annual rate of house price inflation dip below 10% for the full year, and continue in single figures in 2005.”

This month’s Rightmove figures present evidence of falling house prices, particularly as August’s drop came at a time of year that is traditionally quiet. With further falls to be expected over the next two months, how far is the correction likely to go?

“The dynamics of the property market have changed,” says Miles Shipside, “as buyer power takes over from seller power. Buyers have a larger choice of homes available to them, with average stock levels on estate agents’ books now at 68 properties, almost 40% up on the beginning of 2004.

“Recently, buyers haven’t liked the price tags on homes for sale, consequently properties are staying on the market for longer. It’s taking 10_ weeks to sell homes 3 weeks longer than in the spring. The current situation of surplus stock and slack demand won’t change before the New Year, and this will exert further downward pressure on pricing. Sellers who need to sell urgently over the winter will help set a base level of prices that purchasers are prepared to pay. Sensible sellers will be willing to ‘talk turkey’ before Christmas with serious buyers… and, if you are selling and buying in the same market, then what you lose on one, you should gain on the other.”

“Looking further forward, however, the fundamentals of the market look solid: interest rates seem to have reached their peak, and the economic environment remains good. Sooner or later, people’s need to buy a home will overcome their reluctance to commit in an uncertain environment. As more young people choose to rent rather than buy, demand for rented accommodation may push up rents and encourage landlords to invest in new buy-to-lets. Rising rents and historically low borrowing costs will likely provide an impetus for first time buyers to take advantage of the attractive deals available and use their buyer power.”
“It’s all a matter of timing,” concludes Miles Shipside. “There will come a time when buyers will start competing again for homes and that will eventually push prices up. It may well be that the wily buyer can do a better deal in the dog days of winter with certain sellers becoming increasingly desperate to sell their property.”

If annual house price inflation drops to single digits, this would be a healthy development and a sign that the market is sorting itself out, without anything as drastic as a crash. The majority of sellers have good equity in their property, and taking a couple of steps backwards is a lot easier when many have just had a 5 year sprint.”

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