With the world in a recession, house prices in the UK have fallen to levels not seen since March 2005. There has been a drop of 15.1% in prices in the past few months and in January alone, the housing market suffered a 0.8% decrease in prices.

The average home in the UK is now worth about £157,000. These prices are at a level that existed in 2005 before the banks started using affordability calculations in determining how much money a consumer could borrow in a mortgage loan. Previous to that mortgage lending was based on income and multiple based lending regulations.

In the affordability calculations, if you went to a bank to apply for a mortgage you would be approved if your monthly housing costs were less than 32% of your income and if your overall debt did not exceed 40% of your income.

The decrease in house prices does not affect all of the UK. The prices in London and the South East fell only about 0.1% and some parts of the Midlands have actually seen an increase in prices, where they are up about 0.3%. There was no change at all in Yorkshire and the Humber. Wales was hit hard in January with an 8.8% decrease. The price of an average home fell about £11,200, but the Land registry attributes this great decrease to the small volume of sales during January.

Due to the drop in the prices of homes, estate agents are reporting a renewed interest by consumers in the housing market. The low prices coupled with the unprecedented low interest rates make this the optimum time to buy a home. However, with the many job cuts that have taken place in the UK, it is unlikely that these factors will result in a swift turnaround for the housing market in the coming months.

According to Howard Archer, chief UK economist for IHS Global Insight, “While latest mortgage approvals data suggest that housing market activity may have bottomed out and survey evidence indicates that buyer enquiries have picked up significantly recently as people are attracted by lower house prices and the Bank of England slashing interest rates, we are sceptical that sales will pick up substantially anytime soon and put a floor under prices.”

Archer goes on to say that mortgage activity at the present time is very low when one compares it to long-term activity. He feels that while many consumers do want to purchase a new home or upgrade to a larger property, they are looking at the mortgage industry in very casual terms and are very cautious about “committing to buying a house in the current economic environment. Consequently, only a major bargain is likely to tempt them into actually buying a house.”

The falling house prices have affected the amount of equity homeowners can realize in their homes. Many who borrowed on this equity now find themselves in the precarious position of owing more on their home than what it will sell for on the market. They are also eying the market and waiting for prices to rise.

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