Property ladder to remain a shaky stairway to wealth or positive equity for some time, says PwC

LONDON BRIEFING:British house prices are in no hurry to rise and remain vulnerable to a range of setbacks, writes FIONA WALSH

IT’S GRIM news all round on the housing market, whether you’ve already made it on to the property ladder or are still desperately trying to clamber onto the bottom rung.

A clutch of dismal reports this week have underlined the fragility of the recent recovery and warned that there could be far worse to come.

PricewaterhouseCoopers (PwC) presented the starkest scenario – that it could take another 10 years before house prices return in real terms to the record levels reached in 2007. The accountancy firm puts the chances of this at an alarming 50 per cent, bad news indeed for the growing number of Britons who regard their properties as their pensions.

The chances that Britain’s homes will be worth less in 2015 than they were in 2007 are put by PwC at 70 per cent.

The housing market “remains vulnerable to setbacks”, the accountancy firm warned, particularly as interest rates start to rise, either later this year or in 2011.

That is likely to have a significant knock-on effect on consumer confidence (already battered by the government’s austerity measures) and on the faltering recovery of the economy.

The bad news does not stop there. The Royal Institute of Chartered Surveyors (RICS) has highlighted a significant shift in supply and demand, with far more properties flooding on to the market since the abolition of the controversial home improvement packs that were, briefly, required from every vendor.

Now there are more sellers than buyers, another factor forcing prices down. RICS says the number of homes being put on the market has been rising at its fastest rate for three years.

In another report, Capital Economics consultancy suggests property values could crash by as much as a quarter in the next three years, wiping about £40,000 off the average value of a house and taking prices back down to levels last seen in 2003.

It predicts a drop of 5 per cent this year, followed by two years of 10 per cent falls as the fiscal squeeze really starts to bite, with rising unemployment and shrinking household budgets.

Falling house prices should, in theory, be good news for buyers struggling to get a mortgage. But, just to complete the housing market misery, the Financial Services Authority (FSA) is proposing a clampdown on some of the riskier mortgage products still available despite the lessons supposedly learnt by lenders – and borrowers – in the financial crisis.

In a move that will be bad news for self-employed mortgage hopefuls, the City watchdog wants to ban self-certified mortgages, more commonly known as “liar’s loans” because it is so easy for applicants to inflate their income and thus take on a mortgage they will struggle to repay, particularly once the economy turns bad.

Such loans have worked well for many self-employed customers, who are often unable to provide evidence of their earnings, such as payslips, but the system is clearly open to abuse, and to over-optimistic assumptions from applicants.

The FSA now wants lenders to tighten up on fast-track mortgages and to carry out affordability checks to ensure applicants can service their home loans.

In a consultation paper on responsible lending, it is also calling for a tightening up on risky interest-only mortgages, which have been growing in popularity in recent years, with many borrowers using them as a last resort to get on to the housing ladder.

According to the FSA, almost one-third of mortgages taken out at the peak of the market were interest-only loans. The problem with this type of loan is that many of the customers who take them out fail to make any proper plan to repay the capital, as they eventually must. Instead they bet on being able to sell their house at a later date, at a vastly increased price, enabling them to repay the loan and buy another property. The rather large flaw in the plan is that house prices do not always rise.

The new rules will make it even harder for many would-be home owners to take on a mortgage – some industry bodies are warning that future generations could be frozen out of the market – but they are long overdue.

Indeed, it seems extraordinary that it has taken the regulator so long to address the problem.

Between 2007 and the first quarter of this year, according to the FSA, almost 50 per cent of customers who took out mortgages did so without having their income verified by the lender. And 46 per cent of households either had no money left or had a shortfall after mortgage payments and living costs were met.

Now that is what you call an accident waiting to happen.

Fiona Walsh writes for the Guardiannewspaper in London