House prices may have fallen in most areas, but some pockets of the UK remain defiant. Barney McCarthy looks at the resilient regions

After several years of phenomenal growth, house prices in the UK have hit the rocks recently, with the majority of areas registering monthly falls for most of this year. But the picture isn’t all doom and gloom for all areas, or indeed all consumers in the UK. After all, if you are a buyer with a large enough deposit and are able to secure a mortgage, you could take advantage of slightly lower prices, depending on the area in which you want to buy.

Flying the flag

Nationwide’s House Price Index for the first half of 2008 revealed that house prices are lower now than they were a year earlier in 12 out of 13 UK regions. The sole steady market was Scotland, where prices are 0.6% higher than a year ago. Fionnuala Earley, Nationwide’s chief economist, says: “Scottish house prices have already proved more resilient than prices in other UK regions during the first quarter and this trend has been sustained in the most recent quarter. On most measures of housing affordability Scotland compares quite favourably with other UK regions and this is likely to be the main reason why the correction in prices has been less drastic than elsewhere.”

Jill Burns, assistant property shop manager at Inverness-based estate agent Munro & Noble, says: “Prices in Scotland are still lower than the rest of the UK, so growth has been more stable. People still think they are picking up a bargain, particularly if they are moving into the area from somewhere else. In terms of our business, prices have remained the same, it’s just that properties are taking longer to sell.”

Margaret Sutherland, property manageress at Innes & Mackay, also in Inverness, says: “It is definitely a buyer’s market at the moment. We have 50% more properties on our books than this time last year, but it simply means there is more choice. House price growth in Scotland has always been steady and I expect it to remain stable.”

However, while the Scottish housing market has shown admirable resilience up until now, it too is starting to show the cracks evident around the rest of the UK. Despite marginal annual growth, prices have dipped slightly in the last two quarters.

Fighting the falls

It is not just Scotland that is digging its heels in as house prices slide. Nationwide’s research also highlights the ‘hottest’ towns and cities. The top five is made up of Cambridge, Canterbury, Oxford, Carlisle and Aberdeen. It is difficult to establish a geographical pattern here, but one interesting observation is that they are all home to universities. With thousands of students looking for accommodation, property investors clamouring for digs to let may have helped house prices defy national patterns.

Other factors can also contribute to individual towns bucking the trend. Halifax published research last week showing how two-thirds of market towns have a higher average house price than neighbouring areas. Martin Ellis, chief economist at Halifax, says: “Homebuyers continue to be attracted to the high quality of life, architecture, history, setting and community spirit offered by market towns and are prepared to pay a premium to live there. Most market towns have higher house prices than other towns in their county. The majority have also seen stronger house price growth than the English average over the past five years.”

Reasons to be cheerful

Reading too much into national averages and figures representing huge swathes of land will always iron out anomalies – in this case, those pockets of the UK where prices have remained steady or improved aren’t mentioned by the doom mongers. The one silver lining to the cloud hanging over the housing market is that price falls may make the bottom rung more accessible for first-time buyers, but this opportunity is tempered by the tightening of criteria among UK mortgage lenders this year. Keep a positive perspective though – all clouds eventually pass.

The latest house price index from Halifax has revealed housing affordability is improving significantly, with the house price to average earnings ratio falling below 5.0 for the first time in four and a half years.

The ratio has now fallen by 16% from its peak of 5.84 in July 2007, with the firm predicting further improvements.

House prices declined 2.2% in October, taking the average price to £168,176 – the same level as October 2005. Prices have now fallen 13.7% over the past 12 months, but remain 22% higher than five years ago.

Activity in the housing market also appears to be stabilising, with the number of mortgages approved to finance house purchase broadly unchanged in September for a third successive month, at a seasonally adjusted 33,000 compared to 32,000 in August. Approvals in the third quarter, however, were 25% lower than in quarter two.

Martin Ellis, chief economist at Halifax, said: “Housing market conditions remain challenging in the face of the significant pressures on householders’ incomes and the reduction in the availability of mortgage finance since last summer.”

The Bank of England shocked the country today by slashing 1.5 percentage points off interest rates today - the largest cut it has made since it was granted independence in 1997 - as it tries to ward off a deep recession.

The Bank’s monetary policy committee cut to 3% from 4.5%, the lowest since the early 1950s as it responded to huge pressure from industry and unions to make a deep cut in borrowing costs.

The Building Societies Association immediately began to prepare the ground for the deep cut in the cost of borrowing not to be passed on in full to customers and would-be homebuyers.

Adrian Coles, director general of the BSA, said: “This reduction in the bank rate will provide some support to the housing market and especially borrowers on tracker rates. However, borrowers looking for new fixed rate deals or homeowners with mortgages linked to money market rates will not necessarily find their mortgage rate decreasing”.

Cole said there were a number of reasons why the rate cut may not be passed on, including the need for building societies to fund the cost of the bail-out of the Bradford & Bingley and Icelandic banks, the need to maintain profits, the need to keep savings rates high and competition in the martgage market.

Andy Bond, chief executive of the Asda supermarket chain, said lenders had a responsibility to pass the rate cut on in full: “It is essential that banks and building societies pass on this saving to their customers. Everyone has to play their part and financial institutions are not exempt.”

Cheltenham & Gloucester, the mortgage arm of Lloyds TSB, was the first lender to declare its intentions. The lender, which will soon be 43% owned by the government, is passing on the rate cut in full - despite comments by chief executive Eric Daniels earlier this week that suggested they may not do so.

HSBC, Nationwide, Barclays and Royal Bank of Scotland said they were reviewing the situation. There was no immediate comment from HBoS, the country’s biggest mortgage lender, but together with RBS, it will be under huge pressure to pass on the full effect of the rate cut.

Today’s move adds to the emergency half-point cut it made last month in concert with other central banks around the world in the midst of last month’s banking system turmoil.

Pressure had been mounting on the MPC all week from a run of poor figures from the manufacturing, construction and services sectors which showed one of the sharpest overall declines on record, suggesting the economy is weakening at a pace not seen since the recession of the early 1990s.

And earlier today the Halifax reported that house prices slumped 2.2% last month from September, the sharpest drop since May, and one which took the annual rate of change down to -15%, the worst since the series began in 1983 and lower than at any time during the house price crash of the early 1990s.

“Housing market conditions remain challenging in the face of the significant pressures on householders’ incomes and the reduction in the availability of mortgage finance since last summer,” said Halifax chief economist Martin Ellis.

“But housing affordability is improving significantly. The house price to average earnings ratio has fallen below 5.0 for the first time for four-and-a-half years. We expect a further improvement in the ratio over the coming months.”

Its announcement was followed by official data showing new construction orders tumbled by 19% in the three months to September from a year earlier, as orders for new houses more than halved. And the Society of Motor Manufacturers and Traders said new car sales were down a hefty 23% in the year to October, suggesting consumer and fleet spending is falling sharply.

“Sharply deteriorating private car sales is a further clear sign that consumers are now sharply cutting back on their spending,” said Howard Archer, economist at IHS Global Insight. “While consumers are increasingly cutting back on their spending out of necessity, but it is also evident that many consumers are also retrenching out of choice, reflecting their heightened concerns about the economy and jobs.”

Marks & Spencer on Tuesday reported its profits had slumped by nearly half in the six months to September as shoppers stopped buying expensive food treats and reined back their spending on clothing and homeware.

Gordon Brown yesterday urged banks to pass the rate cuts on to their mortgage holders amid reports that some banks were not planning to do so. Several banks have announced this week that they are raising their tracker margins over base rate for new customers, although existing customers with trackers will benefit from the rate cut while savers will undoubtedly see their savings rates cut. The cut should save £135 on a typical £150,000 mortgage.

Few in the City expect it to stop here - most are expecting rates to be cut to 2% or less in the coming months. Consultancy Capital Economics is pencilling in rates at just 1% by the end of next year.

Howard Archer, chief economist of Global Insight, said: “This has gone further than we thought, but it is fairly justifiable and shows just how worried the Bank of England is about the economy and the possibility of a deep and long lasting recession. It also reflects concerns about the real prospect of deflation.”