EVEN the housing market’s most resolute optimists are having to admit that times are tough.

Last week’s astonishing figures from Halifax, indicating that in March house prices had dropped 2.5%, the sharpest fall for nearly 16 years, were only part of it. Even as the Bank of England cut interest rates, mortgage lenders were withdrawing their most attractive deals and calling an end to home loans of 100% of a property’s value.

Tony Pidgley, managing director of housebuilder Berkeley Group, said: “There’s no use pretending otherwise, this is serious stuff. There is a lack of feel-good factor and there’s a limited availability of funds. The housing industry is in for a very tough time. People are just going to sit still until this crisis is over.”

Analysts reckon Berkeley’s sales are about 30% below the level this time last year.

Berkeley is far from alone. Miller Group, Britain’s largest privately owned housebuilding, property development and construction business, last week said it faces “the most difficult short-term market conditions in over a decade in our housing and commercial-property businesses. Consumer and investor confidence is weak, and the banks’ repricing of risk will further constrain both personal and business demand. This has impacted on forward housing sales, which at the end of March were more than 30% behind the level at the same time in 2007.”

Few deny that the housing market has hit a sticky patch. The trickier issue is the degree to which the effect of the housing market’s woes will spill over into the rest of the economy – and how hard it will hit housebuilders themselves.

Certainly, the stock market has fallen out of love with them. Barratt’s share price has fallen by more than two-thirds in just over a year. Shares in Persimmon, Britain’s largest housebuilder, have more than halved.

Barratt is seen as one of the most financially vulnerable. It bought Wilson Bowden for £2.2 billion last year and at the end of December had net borrowings of £1.7 billion.

Finance director Mark Pain insists it has a very good level of liquidity. He said: “We have committed facilities of £2.6 billion. The only level of debt we have to refinance in the short term is £600m by the end of April 2009, and we are already in discussions with our lenders to see if we have to push that out further.”

Pain would not comment on the terms of the covenants covering Barratt’s loans. But it emerged late last week that the company is putting its commercial-property division, Wilson Bowden Developments, up for sale. Barratt hopes to get more than £250m for the operation. The company has also reined in its land purchases.

Despite the gloom, housebuilders insist there are pockets that continue to thrive. Keith Miller, chief executive of the Miller Group, said: “There are a few areas where prices are going up. And in any case, it is not as if prices are falling disastrously anywhere. The problem is that we aren’t seeing the volumes of sales we would like. People just don’t want to commit.”

Pidgley said: “Yes, there’s clearly a glut of flats in some areas, but we’re finding no problem in selling quality houses – not luxury, but good quality – for, say £300,000 to £500,000.”

Few are prepared to predict how long it will be before the credit crunch eases and the housing market has at least a chance of regaining some of its poise.

John Stewart at the Home Builders’ Federation, said: “The housing market was beginning to weaken last year, but it is clearly the credit and mortgage situation that is now the key. The longer it lasts, the greater the risk that there will be a spill-over into the rest of the economy.”

Certainly, rising house prices have, until now, underpinned consumer spending. In part, this has been through equity withdrawal – using a home as security on loans to finance spending completely unrelated to housing.

And in part, it has been simply a result of people’s increased perceived wealth: knowing they had a valuable asset in their home encouraged them to ease open their purse-strings.

Retail sales this year appear to have held up better than many predicted. Retailers of household goods, though, have suffered a squeeze. Last week, DSG, parent of Dixons and Currys, issued a profit warning, admitting customers appeared to have become reluctant to buy electrical goods unless they are discounted.

Does it really matter if house prices fall? We have been here before: there was a house-price slump in the early 1990s.

In the summer of 1988, those who were already on the property bandwagon were rejoicing: house prices had risen by more than a third in the previous 12 months. Indeed, prices did continue to increase for a while: they edged up until spring 1989.

Then the slide started. On the face of it, this didn’t appear to be a sharp fall: from their 1989 peak to the 1995 trough, average house prices fell 13.2%. Over six years, that’s not too drastic.

However, the headline number is misleading. It was a period of high inflation – far higher than today. The fall in house prices may appear modest, but in real terms – taking general inflation into account – it represented a 34% decline.

After prices started to recover in 1996, they took just two years to get back to the level of 1989.

Again, this ignores the effect of what had been happening in the economy as a whole. In 1989-98, general inflation had eroded the purchasing power of money by 28%. In other words, the price of a house bought at the very peak of the market in 1989 might have recovered its value in nominal terms nine years later, but it was still worth far less in real terms.

Strikingly, people unlucky enough to have bought a house in 1989 had to wait until June 2002 before they were back to square one. Only then was their house, in real terms, worth as much as they had paid in 1989.

Last week’s cut in Bank rate has done little to ease concerns about the housing market. While the Bank of England may have cut its rate, the market rate for interest charged between banks – against which most mortgages are set – has scarcely moved.

Berkeley’s Pidgley said: “This crisis has come so quickly. But then, I think it could go away just as quickly.”

Maybe so. However, few are counting on it.

BUY TO LOSE

FOR YEARS, the boom in property prices kept the buy-to-let market healthy. In 2002-7, total annual returns for buy-to-let investors – rents plus capital appreciation – averaged 14%.

However, rents alone provided less than half of that total. Nationally, rental yields are now reckoned to average about 5%. But according to the Association of Residential Letting Agents, the value of rental properties – both flats and houses – fell in the six months to February.

Chris Town, former chairman of the Residential Landlords Association, said: ‘I am sure there are going to be a lot of people who end up losing out. It is just amazing how people piled in indiscriminately.’

He takes as an example a large development just outside Leeds city centre: ‘Three of four years ago, flats there would have fetched £1,250 a month. Now, they are probably going for £800 a month.

‘The flats themselves cost something like £225,000. So the arithmetic just doesn’t stack up. From the rent, you have to take out management charges and agents’ fees. And the numbers assume that the flat is occupied for 12 months of every year – clearly unrealistic.’

He added: ‘A few years ago, plenty of people would simply buy a flat as an investment vehicle in the hope – justified back then – that the value would go up.

‘They didn’t even bother trying to find tenants; the flats would just sit empty and a few years later they’d be sold at a profit. Those days are behind us now.’

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