Are House Prices Set to Drop?

house

UK House prices have experienced a roller coaster in recent years. The economy is fundamentally weak, but house prices have often surprised analysts and proved remarkably resilient. The UK has a combination of rising number of households and limited supply which can push house prices higher, even during difficult economic times.
housing

Arguments that house prices will fall substantially:

  • House Prices increased faster than earnings. Despite the fall in house prices we saw after the credit crunch, the ratio of house price to incomes is still well above levels seen in the mid 1990s after the 1990s crash (House price to earnings ratios fell to 2.1 in 1995) See: House price to earnings ratios
  • First Time buyers increasingly priced out of the market,
  • Mortgage lending is becoming stricter since credit crisis. Banks have largely jettisoned previous unconventional mortgages; now buyers need to save a decent deposit and can only borrow a limited 3 times income.
  • Fall in confidence in housing market.
  • Although interest rates are currently very low, when the economy recovers and interest rates rise, we are likely to see a sharp rise in the cost of mortgage payments, meaning many more households will start to struggle to meet payments leading to fall in demand.

Why House Prices May not fall

Limited Supply.  There has been a disappointing number of houses built in the UK. Demand continues to outstrip supply. This limited supply has partly been due to weak economic factors. But, also it reflects the fundamental problems of getting planning permission. See also: number of new homes built in UK

homebuilds

See: House Prices set to drop for more details

Rising Number of Households The UK population is set to rise to 70 million by  2030. The rising population leads to rising demand for housing, but it is not clear whether the supply will be there to meet it. The number of households will also be boosted by demographic factors which lead to smaller household sizes.

Cheap Mortgages. For those with a variable mortgage, low interest rates are making mortgage payments more affordable, increasing demand for houses

 

I will shortly be writing about the economic and financial implications of falling house prices. But, I would be interested in your experience. Do you think UK house prices will fall substantially, or will they soon recover?

Please feel free to leave a comment below.

Picture by: T.Pettinger, Oxford, UK

26 Responses to Are House Prices Set to Drop?

  1. Laura September 18, 2007 at 8:13 pm #

    Very interesting! I am in the U.S. and housing prices have already dropped in many markets.

  2. Rachel September 20, 2007 at 12:31 pm #

    Can I just ask why the estate agents are not doing anything regarding house prices.

    I am a waiting first time buyer that cannot afford to live on her own in a one bedroom flat.

    I live with my mum who bought our property 7 years ago for £75,ooo and the estate agents now estimate it at £178,000. It is appalling. Why aren’t the government stopping estate agents putting these huge prices on the flats/houses?

    Why are there not any guidelines that mortgage lenders should stick to?

    I.E. when a property is bought, it should not increase in value by no more than so much percent…?
    Even if all renovations are being done? This may also stop the people who are buying to renovate and sell as they will not make as much as a profit.

  3. Richard Pettinger September 22, 2007 at 11:15 am #

    I answered here:

    http://www.mortgageguideuk.co.uk/blog/housing/estate-agents-and-the-housing-market/

  4. Andy October 21, 2007 at 7:39 pm #

    I believe prices will fall at some point soon.

    I annoys me to think that that this price boom was allowed to happen, the gov, esate agents, lenders, greedy sellers are all guilty.

    We have seen it all before boom and bust, the bust can’t come soon enough for me.

    I rember when you could buy a 3 bed property (mid 1990’s) for £40 – 60k how can they be worth the extra £100k now????? It’s total rubbish to think they are worth that.

    Bring on the bust NOW!

    Andy

  5. Earthling November 9, 2007 at 9:09 am #

    Same issue in the US, especially big cities. Prices in 2004 went from $200,000 homes to $1.6m homes. It is actually disgusting, and here is hoping that a lot of these speculators and realtors get caught up in the big bust.

  6. carl cattell November 27, 2007 at 3:57 pm #

    In my area prices are already falling back a little with discounts of between £5-15000 already offered on quite a few properties. Given the stricter mortgage regulations now in place and higher interest rates I think they will fall further in 2008, maybe by 5% or so. Then with average pay rises at about 3-4% how on earth can house prices keep rising by 15%?? There has to be a period of adjustment to allow earnings to at least catch up! Also is it truly the end of the world if prices fall a little? We’ve had 200% growth in 7 years, to fall back by a few % now is not exactly a disaster…. unless you bought to invest in the last 2-3 years looking for a quick profit!
    Hopefully as discussed in other entries here – speculators will now begin to sell off some of the properties gathered as investments alone, thus lowering prices further and allow more people looking for a HOME to get a look in!

  7. dave November 28, 2007 at 8:38 am #

    i got my first house for 50,000 now i got 60,000 form the x whife and i still CARNT AFORD A HUSE WHEN IS THE CRASH GOUING TO HAPPEN ?

  8. Jason December 9, 2007 at 1:05 am #

    Hi, I’m getting sick of this, the girlfriend and i earn around 30-35k between us a year and we can not even get a flat. Meaning we both have to stay at home, do we work for nothing? I hear so many different stories. Houses prices will bust and drop 50%, then i hear they will only drop 5% in 6 months. I hope there will be a big enough drop so we can buy…!

  9. Kevin January 26, 2008 at 4:55 pm #

    In responce to Rachel, since you feel it is so unfair that prices have risen so high, why does your mother not sell her property to you at say £85k, this would surely please the both of you?

  10. matt February 13, 2008 at 1:25 pm #

    I think they’ll most likely fall, but whether that’s by a fraction or by a lot is a different question.

    Who’s to blame? I’d say low interest rates coupled with companies irresponsible enough to lend money to people who clearly can’t afford to pay it; but also the people that borrow money when they can’t afford to pay it back.

    Most people are aware of the former problem but few seem to notice the latter. We each have a brain and should each have the presence of mind not to borrow more than we can afford to pay back.

  11. JAMES February 15, 2008 at 2:27 am #

    You guys need a bowl full of cheer the **** up

  12. Ben February 15, 2008 at 2:29 am #

    House prices will rise considerably this year. Stop basing you opinions on media hype, you should actually figure it out for yourself using your brains. …if you have any

  13. dhuksha February 21, 2008 at 1:13 pm #

    are there any house price formulae?

  14. mary February 27, 2008 at 5:30 pm #

    hi to all

    I’m trying to sell a 6 bedroom property i’m living in renovated to the ultimate standard and valued at £210,000.00.willing to accept anything over £185,000.00, thats not being greedy as I’l be buying for same amount aswell! seen a properties only 4 bedroom for this amount so its not as bright as you think on the other side!

  15. Vicky March 7, 2008 at 2:04 pm #

    Personally I think we are on the brink of a very big correction. And yes it is a Correction. Gordon Brown famously said he would not let house prices get out of control, but they have and in way not dissimilar to that of the 90’s.
    We were steered away from the correction in 2000 when we were encouraged to borrow more, easy credit allowed the public to continue spending in the high street and this helped keep inflation down thus keeping interest rates down as well.
    The credit crunch has all but a halt to that. Interest rates are up, cheap and easy credit is no longer easy to come by and equity is in most cases all but gone by people continuing to re-mortgage and borrow more than is necessary.
    When there is no more credit to be had, spending on the high street is where people cut back, and this creates the vicious cycle.
    This housing bubble has occured through reckless lending and ultimately it is the average Joe who will pay the highest price.

  16. Darren March 15, 2008 at 3:29 pm #

    Having recently worked in the estate agency industry myself I have seen what is happening from the inside. What I have become aware of is property in good condition will still sell without too much effort and other properties in not so good condition need to a market more competitively and vendors need to quickly realise your cheap small local agents are no longer capable of selling most properties in this marketplace, the days of the bigger agent with bigger marketing and yes bigger fees is slowly coming back, pay more get more.
    Also I dont see prices plumeting or crashing as people hope as most can afford the mortgage they have and most people signed up to fixed rate and discounted deals and so will not be in a position of desperation. I think all we will see is a huge market slow down some properties like probates and so n may sell below market averages but all in all I think it will be a period of income catch up and until that gap has closed many people will be forced to stay where they are for this period, so we will probably see more families expanding in the current their current homes and some couples putting off children or more children until more suitable times. I firmly believe this is the future for the uk market I see no crash, no massive drops just a state of limbo for many as they many will not be able to sell for lower market values but will be in a comfortable position with their current property, so I see a good 3-5 years for the building trade as we will see trends like most London areas over the last 8 years where many people found themselves in similar situations and had no choice but to extend and convert lofts.
    Can I also just say how wrong it is towish a collapse in the housing market as we all know people who would suffer dramatically if we saw a repeat of the last. I know many people who have struggled for many years to buy a home and only just barely manage to keep afloat, how can you wish such negative things on people just like you and your friends/family. Why not be positive, try and solve your problems instead of just being bitter and wishing other peoples lives are destroyed and look at ways of making the government help you, and why not look into about exploring shared ownership and housing associations etc.

  17. mark hammond March 21, 2008 at 8:34 pm #

    hello, for what its worth its simple logic. Houses are priced too high at the moment through supply and the buy to let boon of the last 2-3 years. Tv programmes showing how easy it is to make 250K profit in 4 weeks have led everyone to consider being a property developer. The adjustment is happening as we speak. Houses have fallen by at least 5-10% and i am sure that by the end of the year we’ll be looking at 8% less. This combined with the way people cannot think for themselves and have to follow like sheep will result in a bigger 10% drop the following year (2009). Prices will never drop by 30% or more on pure ecomonics alone, a 100k mortgage cost 550 per month and rental will cover this figure, therefore any 2 or 3 bed property becomes viable at this price. the market will maintain itself around this base figure. Inflation will push up earnings, not houses coming down. after 2 years i cant comment, but in the long run you’ll be back up there, just look at the price of fuel now and expect that to get higher, while we all have our pants pulled down!!!!!!!!!! take care and be happy its all that counts. markehammond@hotmail.co.uk

  18. neiltanseyuk March 26, 2008 at 11:27 pm #

    House prices WILL most definitely fall in 2008. They should have fallen years before but, the banks have been lending beyond the capabilities of many first time buyers as have happened in the U.S. With the onset of the credit squeeze, first time buyers @ less than 10% deposit and 100%+ mortages will disappear causing a major upset to the basics of supply and demand understanding…. No demand brings on happy hour! Wait until after the summer to see the crash. God! I feel for those who have bought in the last 18mths.

  19. STEVE April 10, 2008 at 8:36 pm #

    It’s typical that agents and property developers are saying that prices will still increase because that is what they still want! but in reality it’s obvious that through history (which repeats itself) the inevitable will happen. Prices will gradually drop over the next year or 2 an then we will see a significant drop as more and more people struggle to pay their over inflated mortgages and debts. I know many young families that are paying £1000 plus for their mortgages and struggling to a stage where they are thinking of moving back in with their parents and letting their properties. This is a growing trend. The many people over the last couple of years have been pressured into buying property with relatives and friends telling them that they need to buy as the prices will continue to rise. Well the proof is happening now with the sub prime market in the US and similar things happening here in the UK now and about time too!!!

  20. Tim April 20, 2008 at 9:08 pm #

    It seems to me that the causes of the problem are clear. When I purchased my first house, the guidelines (enforced by all reputable lenders) were that they would lend at most 2.5*base salary plus 1*base salary for a spouse. This put an effective cap on the price of houses, and allowed people with the largest mortgages allowed to still live. (i.e pay the other bills)

    Since the mid 80’s lenders have thrown away the guidelines, and leave it to the borrower to decide what they can afford – this leads to huge pressure on people to borrow beyond their means, and has seen some couples borrowing 5 to 7* salary, allegedly.

    These sorts of multiples are ridiculous – they are a millstone around peoples necks, that leave them very exposed to any minor pertubations in the economy. (One partner loses their job, interest rates rise, mortgage deal comes to an end etc.)

    Are these individuals to blame for this situation – no not really. They have been swept along by the environment, and no doubt have had advice from the experts that the property will only get more expensive if they don’t jump on the bandwagon soon.

    We are now in a situation where a typical 1st time buyers property, which was 2-3 times a good salary in the mid 80’s is now 6-7 times a good salary today. This is un-sustainable, and there are only two options:-
    a) Salary Inflation takes off, to double peoples salaries in the next few years (Seems unlikely!).
    b) House prices crash (Seems inevitable)

    So the question then is, “By how much?”. If we really care about family life, then they should crash far enough so that for the average couple, one partner can support the family, in an average house, without requiring the other partner to work.

    I think a significant price crash is inevitable. Alongside the price crash, the banks need to re-institute a “Sensible Lending” policy, which dramatically reduces the amount they will lend based on 1st and 2nd salaries, so that the ridiculous multiples of the last few years are not repeated. (This seems much less likely)

    And as a final comment, is it for the Banks to set the guidelines? In my opinion no – Thats what government is for. The Government should be setting guidelines on what is acceptable lending, so that the whole market cools down and following the crash, doesn’t race off again as it did the last time!

  21. Chris August 3, 2008 at 9:54 pm #

    Average salary in Britain is £24000

    Average house price is £190000

    That is 7.9 times salary

  22. Selfbuild Ambassador March 20, 2012 at 4:37 pm #

    The housing market in the UK has been shaky for some time, and it’s difficult to predict when it might reach the heights of 2007-8. This may or may not put you off entering the housing market but whatever you decide, it’s worth considering an alternative to buying – why not build your own home? After all, the government has plans to simplify the planning application process, and you’d be surprised at how affordable it is. Your biggest hurdle will be finding suitable land for sale, but once that’s been achieved, the costs are remarkably low, and certainly within most peoples’ budgets. Have a look around, there’s plenty of useful information to be found online, and good luck!

Trackbacks/Pingbacks

  1. Is it a good time to Buy a House? | Mortgage Blog - November 29, 2007

    […] Are UK House prices set to drop? […]

  2. A Year in the UK Housing Market | Mortgage Blog - December 14, 2007

    […] Are UK house prices set to drop? […]

  3. Buy To Let Housing Market | Finance Blog - October 19, 2011

    […] Are UK House prices set to fall? […]

  4. Is Now a Good Time to Buy a House? | Finance Blog - March 14, 2012

    […] Are UK House prices set to drop? ← Making a Money Plan No comments yet. […]

Leave a Reply


eight + = 16

Powered by WordPress. Designed by WooThemes