Recent data suggested the pace of house price falls have accelerated in the UK. Many analysts now suggest that house prices may fall by upto 25% within the next 12 months.
How Much will House prices Fall By?
Halifax predicts a moderate house price fall of 5 -10%. The reasons for a moderate house price fall are:
- Unlike the US, the UK has a shortage of supply, this is unlikely to be addressed in the short to medium term. Therefore with supply constraints it is not unreasonable for the ratio of house price to income to rise.
- Affordability of Mortgages is below the historical high of the early 1990s. The main reason is that base rates (cut to 5% recently) are much lower than in the 1990s slump when interest rates were in double figures for several months.
- Base Rates likely to fall. The slowdown in growth and inflationary pressures is likely to cause a fall in interest rates. As interest rates fall, it will help restore the attractiveness of buying a house (even if it is difficult to secure a mortgage)
Prospects of 30% Fall in House Prices
Despite the difference between the UK and the US, there are still some reasons why the UK could suffer a housing slump.
House prices have risen much faster than in the US. The average house price (just below £200,000) is out of reach for the average first time buyer.
- The credit crisis is causing a rapid decrease in the number of available mortgage products. Firstly 125% mortgages were reduced, but now many banks are withdrawing 100% mortgages. Increasingly big lenders are asking for big deposits of upto 25% – this is making it much more difficult to secure a mortgage. The fall in mortgage lending during 2008 is quite significant.
- Mortgage lending in the UK accounts for a high % of disposable income. In the UK the total mortgage lending is 125% of disposable income (higher than the US where it is 105%)
- Spread betting on UK property prices suggest that markets anticipate a fall of 14% over the next 12 months to april 2009
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3 comments ↓
After defying gravity for so long, I wouldn’t put it past the UK housing market to somehow escape the slump that seems so certain. But I wouldn’t bet on it!
It’s interesting to me that your post lists reasons why the UK is different to the US, whereas I’ve seen so many written the other way around (people saying that the UK wouldn’t slump because we were now more like the US, which had never had a national housing slump, or at least not since the 30s…)
Perhaps the lesson is that every country must be taken on its own terms?
Thanks for comments.
Each housing market is different, and it’s worth avoiding generalisations. It is hard to predict what will happen to house prices, and it is quite likely that they will fall. But, I never forget those who have been predicting a housing slump for the past 5 years.
Disposable income has also fallen due to increased prices for fuel – household gas and electricity plus petrol is much more expensive.
Lower spare income means less money for mortgages = lower prices.
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