Tuesday, April 29, 2008

Long Run Prospects for UK House Prices

Yesterday, Hometrack announced that year on year, annual house prices in the UK had started to fall. There are many short term factors which are bringing house prices down.

  • Sharp fall in mortgage lending. The credit crisis means the banks are struggling to raise money to finance new mortgages. Because there is a shortage of finance they are cutting back on the number of mortgages. The number of mortgage approvals fell by 40% on last year.
  • Rising unaffordability. The cut back in mortgage lending has coinicided with a period of declining affordability. The ratio of house prices to incomes is over 5 for first time buyers. This means that most cannot borrow enough (unless they can get a hefty deposit from their parents)
  • Interest rates not falling. Bank is cautious about reducing interest rates because of rising inflation. When the bank does cut base rates, commercial banks are often not passing them onto consumers.

Yet, despite the prospect of short term house price falls, what are the prospects in the long term?
  • Firstly, house prices don't always recover from property crashes. The property crash in Japan in the late 80s was very prolonged.
  • After the last house price crash in 1992, UK house prices did recover after a couple of years. Firstly slowly but then very rapidly.
  • In the US, the prospects for future house prices look grim. There is a higher level of mortgage defaults and the falling demand has coincided with rising supply; leading to record levels of unsold properties. People even joke of knocking down unsold houses in America.

Long Term House prices forecasts in the UK.

When the mortgage industry gets over its current difficulties (and prospects look bad in the short term - it is hard to see when the difficulties will end) there is good reason to suggest that house price will remain high and over time could regain their upward movement.

These are some reasons why house prices in the long run may continue to rise - Long Run Forecast for UK Housing Market


Are Rising House Prices A Good Thing?

Just because I predict house prices may rise, doesn't mean I think that is a good thing. Personally, I would like to see the government take steps to increase the housing supply in the long term. I think that house prices are too expensive, and this is causing great inequality within UK society. The ideal solution would be for several years of stagnating prices, enabling incomes to catch up with prices. Definitely, the government should try and take steps to avoid boom and bust in the housing market, but, there is no guarantee they will be able (or willing to do this)

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