It is no wonder that house prices are beginning to show a sustained downward trend. Yesterday the British Bankers' Association (BBA) reported that there were only 43,870 mortgage approvals in February, one of the lowest levels on record and down a third on the same time last year. With fewer loans being made available, there is less money swilling around to support high prices. First-time buyers in particular have all but disappeared from the market as few banks are prepared to lend to buyers without a large deposit.

The danger with prices now falling every month is that buyers will start expecting significantly lower prices and will therefore delay making offers in the hope they will be able to pick up a similar property for much less later on. If this happens, it could become a self-fulfilling prophecy, because if buyers withdraw from the market it will undermine demand, reducing the ability of vendors to achieve the prices they want. Meanwhile, if prospective sellers also start expecting large price falls, they may choose to put their homes on the market before things gets too bad, triggering a massive increase in supply, depressing prices further.

Working against this is the fact that the Bank of England may soon lower the cost of borrowing, which should support confidence and eventually make mortgages cheaper. Also, while levels of employment remain high, demand should remain reasonably robust and there will not be enough homeowners selling for “distressed” reasons to undermine the market.

Nonetheless, the more prices fall, and the longer the credit crunch continues, the greater the risk of a big slump in prices. We are not at that point yet, but it is looking more likely now than it was only a month ago.

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