House prices rise in the UK – Much ado about nothing

If you are considering buying investment property in the UK - be warned. The latest headlines from all the major newspapers and the BBC etc, are making a great deal of the fact that average house prices in the UK rose in July by 1.7%

This sounds like great news if you happen to be selling a property at the moment, but in fact - it is the opposite. It also sounds like great news if you are thinking of buying an investment property and were "scared," that house prices might go down. One statistic deliberately omitted from every single piece of "news," I have read, is the dismal level of sales. Sales volumes are bouncing around at the lowest levels since the land registry started keeping records in 1995. Around 40,000 houses were sold in July - down from a peak of 135,000 houses.

Comparing statistical data in this way and ignoring the sales volumes is potentially disastrous. When one considers the fact that the only stock that is selling tends to be at the higher end of the quality scale and to buyers with cash to spend, it is hardly surprising that average prices for houses that were sold rose. 40,000 units sold is not enough to provide a reasonable statistical analysis. It is barely enough to keep the estate agents in business.

If sales volumes were anything like a reasonable level - say, 80,000 units or so, it might be reasonable to conclude that there was some sort of return to health in the market. But - they are not, and every indicator points to a further fall in house prices. We are nowhere near reasonable levels of affordability, and the fact that almost every penny the Bank of England has created and poured into the system is sitting on the sidelines rather than being lent out means only one thing:

The banks and the BoE expect further asset devaluations and are hoarding this money to cope with more property price falls, more loan defaults and yet more bad news from the financial services sector.

The newspapers, the BBC and the estate agents are talking the market up for one reason, and one reason only. They need the money. Sadly, I think this will backfire, because the simple fact is that most buyers cannot raise the necessary deposit for an "average," house - £31,177. Which means that until prices fall further, sales volumes will be depressed.

The real danger here is reinforcing sellers unrealistic valuations. With this much gap between expectations of buyers and sellers, the market is already stalled and in real danger of  coming to a complete standstill. We expect prices to fall a minimum of 20% from today's level and probably much further depending on the depth of the recession that is not happening (according to the BBC).

The other danger is creating more people with a negative equity mortgage and exacerbating the current problems. I can almost guarantee that if you buy a typical house today with an 80% mortgage - in two years time you will owe more money than the house is worth. If you are considering buying now - offer a minimum of 25% less than the estate agent is asking and walk away if they will not deal at that price. If you are a seller - either be realistic or accept that you need to wait this out - probably 5-7 years.

This chart was produced by the Land Registry  - comparing sales volumes and average prices in England and Wales since 1995. As you can see, the level of sales is well below anything  since 1995, and nowhere near sustainable:

Expect substantial price falls when sales volumes eventually start to recover. Some other opinions:

• House prices - why it is not adding up
• Head to head view on house prices
• British property prices