Time to buy index for May 2009

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In May the index stands at 279 unadjusted(U) and 346 adjusted(A)

This gives a guide that house prices are around 28% over valued and that market sentiment pushes that to 34% over valued. DO NOT BUY

That is not to say that house prices will fall by either, but it gives an idea of the direction.

The last few months have had conflicting data from Nationwide and Halifax with positive and negative months of house price data. Both Halifax and Nationwide have reported growth in the housing market this month.

During the last house price crash there were 26 positive months during the 74 month downturn.

The index has risen this month for several reasons. House prices have risen and mortgage rates for low deposit mortgages have increased. Both of these factors make housing less affordable.

The adjusted index would have been even higher, but with a positive growth month the number of negative factors has reduced.

Although Bank of England rates have fallen, new mortgage deals are being priced at pre-cut levels.

The price to average earnings ratio has also risen slightly this month and is still indicating house prices are 10% above trend on this indicator.

Most buy to let deals have been withdrawn now and those that remain have seen a lowering of the Loan to Value needed. There exists only one 95% LTV first time buyer deal in the market and this requires a charge on the parents house, so a 90% LTV is the best on offer. Credit remains tight.

Lenders are coming up with more ingenious ways to lend the money as demonstrated by Lloyds with their latest offering including a charge on parents savings accounts. A route that is so full of pitfalls it looks like a horror show to me.

The unadjusted index is now down from it's peak of 645 in July 2007

PREDICTION

House prices to continue falling with the Halifax index bottoming at £140,000 in Q4 2009.

In my opinion mortgage lending criteria has tightened more than usual with a larger deposit required than in the past, however lenders are still lending above average multipliers and mortgage rates have again fallen to below the longer term normal level.

The end of irresponsible lending means that lenders will never be returning to the days of lending with no deposit or waiving income checks.

House prices are still suspended about 20% above the level of finance that the banks are willing to give out. Interestingly the £xx billions in extra lending that RBS and Northern Rock have blagged to Gordon Brown is a total farce. The lenders have the money to lend but are applying their new stricter criteria to borrowers. The money will not be lent out any time soon, because many borrowers do not meet the criteria.

Buy to let as one of the key drivers of house prices still does not makes economic sense at current rates. This sector will most likely never return to the heady days of 2007 as the age of irresponsible lending is over.

First time buyers are the main driver of the bottom of the housing market. First time buyers have rightly taken the view that it is best to wait out this drop before entering the market.