Monday, April 16, 2007

When Will Property Prices Fall?

Recent evidence from the UK Housing Market suggest that despite recent rises in interest rates, house prices continue to rise above expectations.

According to the website Rightmove the average asking price of a UK home rose by 3.6 per cent - or £8,307 - in the month of March. This is the largest monthly increase since April 2002. This means the average asking price was £236,490. a yearly increase of 15%.

Miles Shipside of Rightmove, said: "Sellers' asking prices provide one of the earliest indicators of which way the market is headed, and while a boost is to be expected around Easter, £8,000 in a month is the largest amount we have ever recorded. Every region saw large increases, with the minimum jump being £3,000."

Why House Prices in UK don't Fall but continue to Rise

1. Fundamental shortage of Supply.

The Demand for houses continues to grow at a faster rate than supply. The government has a target to build 200,000 homes per year, however this target is not being met. In the UK the planning process for building new houses is quite slow. There are many obstacles, especially in the South East; there is a lack of available land and many potential areas are protected by green belt land. Furthermore existing homeowners and councils usually have a vested interest in preventing new houses being built. An increase in supply of houses leads to lower house prices, increased congestion and increased pollution. The shortage of supply in the UK is unlikely to be solved in the short term or even medium term. Whilst this shortage of supply continues house prices will continue to remain high.

2. Low Real Interest Rates.

Although interest rates have risen 3 times since August 2006, real interest rates are still quite low by historical standards. Real interest rate is nominal (base rate) - Inflation. Thus with interest rates at 5.25% and inflation at 2.7% real interest rates are 2.55%. This makes borrowing still relatively attractive. Buy to let is also still giving relatively good gains.

3. Strong Economic Growth

High levels of economic growth and low unemployment continue to create a feel good factor within UK workers. This is increasing willingness to borrow and spend more on houses. In the South East and London demand is being increased by city workers who are getting higher bonuses.

4. Wealth Effect.

The rise of house prices in the UK has created a generational gap between those who bought a house 20 years ago and those who are struggling to get on the property ladder. However many parents are using their increased wealth to help their children get on the property ladder, through giving a suitable deposit.

5. Increased Availability of Mortgage Finance

Mortgage lenders are increasingly willing to lend higher income multiples. They are also willing to promote riskier mortgage products like interest only mortgages and self certification mortgages. This means that although house prices have increased faster than earnings people are still able to get a mortgage.

See also:

Why House Prices may fall in UK soon

Will House prices drop ?

House Prices set to drop

1 comment:

Homes in London said...

House prices may be increasing in London because of the high bonuses that city workers are earning but is it line with house prices? Can they afford the current house prices?