A recent recovery in the housing market is likely to have been built on unstable foundations, a group of economists claims on Thursday, after a fall in demand and prices at property auctions over the summer.

The average property sold at auction in August achieved a price of only 70 per cent of the amount that the same home could be expected to achieve in the conventional market, where homes are bought and sold through estate agents.

This 30 per cent discount has grown from only 10 per cent three months ago, Fathom Consulting said, indicating that demand for homes sold at auctions fell away dramatically after recovering earlier this year.

Danny Gabay, director of Fathom, said the increasing discounts available in property auctions were a harbinger of declines to come in house prices.

“We would expect auction prices to react more quickly to changing market conditions than conventional measures, which suggests that we may see house prices falling again in coming months,” he said.

The price achieved in property auctions gives an indication of the next move in the conventional market, as it indicates the immediate level of demand today. The latest figures suggest that property investors are not anticipating rising prices in the months to come.

Falling auction prices can also be a signal that homebuyers are constrained in the amounts they can borrow, putting downward pressure on auction prices and reducing conventional demand for property.

Aided by Zoopla, the property website, Fathom calculated its auction price index discount by matching the properties sold at auction with land registry data for the same home showing its price in a previous sale. They calculate the discount as the difference between the price achieved at auction and an expected price, based on uprating the previous sales price using national house price indicators.

That auction prices in August were 30 per cent below what the same property might have been expected to achieve on the basis of overall house price inflation “provides a clear contrary signal to the nascent recovery in house prices evident in the more conventional house price measures”, Mr Gabay said.

Prices at auction have been volatile of late, so the findings could be spurious. But trend towards increasing discounts has been evident now for three months.

In contrast to this troubled prediction, most other indicators of the housing market have been recovering. But the latest Royal Institution of Chartered Surveyors survey of estate agents also suggested that some of the recent buoyancy in the housing market was likely to have been caused by a shortage of properties for sale. RICS said in August that its agents were reporting that the stocks of properties on their books were close to historically low levels.

Source: Financial Times