U.K. Home Prices Will Probably Fall Next Year, Brokers Predict

U.K. home prices probably will fall as much as 6.6 percent next year, reversing an estimated 3.7 percent gain in 2009, as rising unemployment deters buyers and more properties are put up for sale, London-based broker Savills Plc said.

Cluttons LLP, a real estate broker also based in the U.K. capital, predicted a 1.5 percent drop in 2010, following a 2.6 percent rise this year.

Britain’s deepest recession in more than half a century is fueling unemployment, and banks have been reluctant to lend since the credit crisis engulfed bank Northern Rock Plc in September 2007. Values will probably start to rise again in 2012, the brokers said. Cluttons predicted they won’t return to the peak reached in the third quarter of 2007 until late 2013, and Savills said that may not happen until the following year.

“It’s all about cash, and the true recovery will be credit dependent,” said Yolande Barnes, head of residential research at Savills, Britain’s biggest publicly traded commercial real estate advisor. She predicted that mortgage lending will be constrained for about five more years.

The brokers’ estimates add to a growing consensus that this year’s price increases may be erased in 2010. In November 2008, Savills predicted an average 11 percent decline this year.

On Nov. 3, Lloyds Banking Group Plc, the U.K.’s largest mortgage lender, said home prices will probably stagnate. Real estate advisers Knight Frank LLP and Jones Lang LaSalle Inc. also predict a drop.

The Brussels-based European Commission said this week that the U.K. jobless rate may peak in 2010 at 8.7 percent as the economy expands just 0.9 percent following a 4.6 percent contraction this year.

Disposable Income

“Housing demand is expected to remain depressed, as labor market conditions will affect disposable income,” the European Union’s executive said.

Uncertainty over the outcome of next year’s legislative elections, higher taxes and likely cuts to public spending will also weigh on homebuyer demand next year, Savills said.

Values rose on an annual basis in October for the first time in 19 months, Nationwide Building Society said Oct. 30. The average cost of a home advanced 0.4 percent from September to 162,038 pounds, the sixth consecutive monthly rise, it said.

Robert Scarff, managing director of Countrywide Estate Agents, said he expects prices will continue to advance after confidence returned to the market this year.

“We expect 2010 to build on this, with the current positive momentum transferring through Christmas into the New Year” and then slowing in the second half, he said.

Empty Shelves

The higher prices were driven by buyers who don’t depend on mortgages, Savills said. Transactions are at their lowest level since records began in 1959, said Barnes, the broker’s head of research. She compared the U.K. market to “empty supermarket shelves.”

Rising prices and a likely increase of property repossessions as unemployment mounts will bring more homes onto the market, depressing values, said Cluttons, which predicted that prices would rise 2.6 percent this year. Demand from buyers will be constrained by banks’ reluctance to lend as they repair their balance sheets.

Mortgage approvals, while at an 18-month high, are still 42 percent below the average of the past decade, Bank of England data show.

Lenders require first-time homebuyers to put up deposits equivalent to an entire year’s worth of net disposable income, or five times more than the average since the 1980s, Savills research shows.

As Britain’s economy recovers, reducing unemployment and lifting consumer confidence, demand from homebuyers will probably increase, brokers said.

The first regions to recover will be London and southern England, which will probably see prices return to peak levels in 2012, or two years earlier than for the U.K. as a whole, according to Lucian Cook, a researcher at Savills. Prices of luxury homes worth more than 1 million pounds in central London will probably fall 1 percent in 2010 after a 6.1 percent rise this year, he said.

UKCIG news, November 2009