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Page last updated at 09:25 GMT, Wednesday, 9 April 2008 10:25 UK
House price falls: Cause for concern?
By Jim Reed
Newsbeat reporter

The price of a typical house in Britain fell by £4,912 in March, according to the Halifax. It is the biggest monthly fall since the housing market crash of the early 1990s and the second largest fall since records began more than a quarter of a century ago. Newsbeat explains how the housing market could affect you.

For sale sign

How worried should I be at the moment?

That depends on your own situation.

If you bought a property more than a couple of years ago, you have probably made money on paper.

The average house is worth 51% more than it was in 2003 and 171% more than in 1998.

If you have bought a home in the last six months then it may be worth less than you paid for it.

Unsold new flats in Cardiff
Many new flats around the UK have not been sold like these in Cardiff

In the 1990s housing slump, tens of thousands of home owners fell into that kind of negative equity, which in turn led to a rise in repossessions.

For the moment at least, only the most pessimistic pundits think that there could be a repeat of that situation.

It is important to remember that, even though prices fell by 2.5% between February and March on the Halifax measure, they are still 1.1% higher than they were last year.

House price statistics are notoriously unreliable and one month's figures should probably be taken with a grain of salt.

If you are trying to get on the housing ladder, then falling prices could be good news. But problems in the financial markets mean that getting that first mortgage could be more expensive and more difficult.

Why are prices falling?

The buzzword here is "affordability".

House prices have risen much more quickly than wages over the last 10 years.

AVERAGE UK HOUSE PRICES
October 2007: £197,000
November 2007: £194,500
December 2007: £197,163
January 2008: £197,243
February 2008: £196,465
March 2008: £191,556
Source: Halifax

(seasonally adjusted figures)

A series of five interest rate rises between 2006 and 2007 also made mortgage repayments less affordable.

To make matters worse, banks and building societies have been drastically cutting back on the number of mortgages available to buy a home in the first place.

A shortage of attractive mortgage deals means there are fewer buyers looking for a house.

In a buyer's market, prices are bound to fall.

How hard is it to get a mortgage at the moment?

Last summer there were 15,500 mortgage deals on the market, according to the financial research company Moneyfacts.

Now there are just over 4,000.

The mortgages that are left tend to be less competitive with higher monthly repayments and stricter terms like a much larger deposit.

A strong labour market, low interest rates and a shortage of new houses underpin housing valuations
Martin Ellis, the Halifax

Over the last couple of years, first time buyers have been able to get hold of 100%+ mortgage deals, meaning they can borrow more than the value of their property and do not have to save for a deposit.

But all major banks have now pulled those deals from the market.

Customers are now chasing fewer loans.

The most competitive lenders are getting more applications than they can process.

They are putting up their rates in an effort to dampen demand.

So this is something to do with the "credit crunch" then?

Most High Street banks need to borrow the money they lend out to mortgage customers.

In normal times, the rate the banks pay is slightly above the Bank of England's main interest rate.

But banks around the world have lost billions after making risky investments in the American housing market.

Queue outside the Kingston branch of Northern Rock
Northern Rock had to be bailed out by the government last year

They are afraid to lend money to each other in case they cannot get it back.

That has pushed up the cost of borrowing between commercial banks.

The increase is now being passed on to mortgage customers at the end of the chain.

Some people argue that this is not necessarily a bad thing.

People are now being forced to borrow more within their means, which, in the long term, could bring some stability to the housing market.

Can't the Bank of England do something?

The Bank of England sets something called the base rate.

That is the rate at which it lends to other financial institutions like High Street banks.

Bank of England
The Bank of England sets the interest rate every month

In that way the Bank of England can influence the level of spending in the economy and, in theory, the level of inflation.

In more normal times, commercial banks price their mortgage deals slightly above the base rate.

But the credit crunch means that many banks have not been fully passing on a Bank of England rate cut.

The average mortgage rate is now substantially above the base rate.

So, while a cut in Bank of England rates is welcome news for many home owners, it might not be fully reflected in your mortgage bill at the end of the month.

What if I am trying to get on the housing ladder?

In normal times, falling interest rates and falling house prices might be good news for first-time buyers.

But the credit crunch has made it much more difficult to finance that first mortgage.

Chances are you will need a larger deposit, probably at least 10% of the property value.

To let sign
Buy-to-let mortgages have been hit by the global credit crunch

Lenders are also cutting something called the salary multiple.

That is the amount you can borrow based on your household income.

Just a couple of years ago, lenders were fighting each other to offer five or six times the household salary.

Now you are lucky to get a four-times deal.

Also, watch out for something called the arrangement fee, an administration charge that needs to be paid before the loan is taken out or added to the overall cost of the mortgage.

Better deals are available if a parent or close relative can guarantee part of your mortgage repayments.

So what is going to happen in the future, then?

Economists and other financial pundits are divided on this.

Most still expect a gradual fall in house prices this year.

Martin Ellis at the Halifax reckons the market is well supported by the reasonably stable British economy.

He said: "A strong labour market, low interest rates and a shortage of new houses underpin housing valuations."

Other, more pessimistic commentators reckon the chance of a serious house price slump has increased.

Howard Archer at the research firm Global Insight said there is a "real danger" that house prices could tumble by 20% this year.



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