Wednesday, October 3, 2007

Are UK House Prices Set to Fall?

For a long time people have been predicting falls in UK house prices. Some people have been predicting the imminent collapse of the UK Housing Market for the past 6 years. However, a drop in house price may soon become a reality. What has changed in the past 12 months which now make house price falls more likely?

1. Sub Prime Mortgage Crisis.

Defaults on US mortgages don't directly affect UK house prices. But, many mortgage lenders have gone bankrupt, and therefore, financial institutions are much less willing to buy mortgage debt from banks like the Northern Rock. As a consequence the price of mortgages is likely to rise, especially for adverse credit mortgages - this is because they are considered more risky and therefore, require a higher premium. The increased cost of mortgages will discourage people to buy houses

2. Lower confidence.

As a result of the sub prime crisis, falling house prices in US and the northern rock crisis, many people are now more fearful about the future of house prices. In particular, this is discouraging buy to let investors. Some people may see 2008 as a year to sell and capitalise on their house price gains.

3. Increased interest Rates.

To combat rising inflationary pressure (which is actually still quite low) the Bank of England have increased interest rates 5 times in the past 13 months. Interest rates are now at 5.75%. Often there is a time lag for increased interest rates to have an effect. For example, people on fixed mortgages will be facing much higher deals when they remortgage over the next couple of months. Therefore, the impact of higher interest rates will continue to bear down on the affordability of mortgages and hence reduce demand for buying houses.

4. Ratio of House Prices to Incomes.

For many first time buyers the ratio of house prices to incomes means that it is difficult to save for a mortgage and difficult to save for a deposit. In the past first time buyers have often got around this difficulty by borrowing from parents and / or using unconventional mortgages like interest only or self certification mortgages. However, the sub prime crisis means mortgage lenders are now more reluctant to lend large income multiples. Therefore, the demand from first time buyers is likely to dry up.

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