The latest survey from the Royal Institution of Chartered Surveyors (RICS) was out this morning, and this time the evidence from this most reliable of surveys points to strong falls in the months ahead, but a possible reversal next year.
The evidence for further falls in house prices for the remainder of this year and early next is irrefutable.

The RICS headline index, produced by taking the percentage number of surveyors who said prices were up in their area last month, and subtracting from that the percentage number who said they were down, fell to minus 49 in October, the lowest reading since April 2009. The index tracking expected prices also fell, down to minus 42.

But for our money, it’s the indices tracking new enquiries, which relates to new demand, and new instructions, which relates to new supply, that seem to be the key.

The new instructions index has enjoyed a higher score than the new enquiries index for every month this year. And so it was in October, with the new enquiries index falling from minus 2 to minus 12, while the new instructions index stood at minus 4.

It takes time for the dynamics of new enquiries and new instructions to show up in prices. And the house price changes we are seeing now may well be a function of what happened with new instructions and enquiries several months ago. And since new instructions have been exceeding new enquiries for some time now, the implication for average price for the next few months is clear: it will fall.

But the October data seemed to highlight a new and quite important development.

The fact is, the gap between the two indices has been falling for several months, and in October we saw the difference between new instructions and enquiries fall to the lowest level since April.

The month also saw the new instructions index go negative, meaning more surveyors witnessed a fall in new instructions than witnessed a rise. It was the first time this had happened since January.

We observed a similar but opposite trend 18 months ago, when the new enquiries index went into decline while the new instructions index improved. We said at the time that if the trend continues, prices will fall. Well, the trend did continue, and now prices are falling.

If the trend seen over the last three months or so continues, then prices should start to rise next spring or summer.

This argument is supported by evidence from Rightmove, which reckons to have observed a pick-up in the number of first-time buyers.

On the other hand, next year won’t be a good year for British households. This year has seen private sector workers enjoy wage rises which were significantly less than inflation. Next year, public sector workers, too, will suffer this fate. VAT is going up, too. All in all then, the average household will be worse off next year. In such circumstances it is hard to see how house prices can rise, or if they do, how they will rise in any significant way.

But while the argument that house prices will inevitably fall as they are simply too high, may seem quite persuasive, until institutional landlords enter the British property market to enjoy the high yields that low prices provide, and start funding new builds, house prices will not hit a logical and sustainable level in the UK.

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