With house prices falling at their fastest rate for 25 years, there looks to be little room for optimism in 2009.
Already house prices have fallen by more than 10% from their peak in July 2007.
These are the main factors dragging house prices down at the moment.
Shortage of credit and mortgages. The number of transactions has slumped as people simply can’t get a mortgage. Many previously popular mortgages have been withdrawn, now mortgage companies are requiring large deposits of upto 25%
Falling confidence. WIth house prices falling at an annual rate of over 10%, there is little incentive to buy now. Potential homeowners are waiting for house prices to bottom out before buying. This lack of interest is exacerbating the downward movement of house prices.
Economy entering into recession. Unemployment is forecast to rise as the UK begins to enter its first recession for over 15 years. If unemployment increases to over 2 million, the rate of home repossessions is bound to increase creating more homes for sale.
House price to earnings ratios still relatively high. Because banks have become stricter in mortgage lending, buyers still struggle to buy a house. Sticking to 3 times earnings means average house prices are still out of the reach of many - especially if they require 25% deposits as some banks are encouraging.
How Much Will House Prices Fall?
Despite the downward pressure on house prices there are some factors which will help the housing market in 2009
- Interest rates are falling and could fall further as the recession and lower oil prices reduces inflation. If interest rates fall, the cost of mortgage payments will look increasingly attractive, especially compared to renting which has been increasing in cost. With base rates of only 5% and set to fall, mortgage payments are relatively low compared to the last housing crash when interest rates reached 12%.
- The Old Problem of Shortage of Supply. The housing crash has not changed long term demographics. The UK population and number of households is still increasing faster than supply. If anything, the housing crash has exacerbated the problem because the falling prices have led to a decline in new construction.
- Renting vs Buying. This housing crash won’t change people’s long term desire to buy a house rather than rent. In many areas buying is becoming a cheaper option than renting; this will come into play soon.
Conclusion.
At the moment there is a powerful momentum of falling house prices. In the short term, it is hard to see this changing, especially with the ongoing problems in the credit markets. Even half hearted measures like a freeze on stamp duty will do little to change the sentiments of the market. Therefore, I feel house prices will continue to fall in 2009, perhaps by 10-15%. However, I feel the crash will be less severe than in America and also, towards the end of 2009, there is the prospect for the slump to bottom out and house prices to gradually regain an upward movement.
- One thing is for sure, the housing market is always interesting! - We never seem to get stagnant house prices.
3 comments ↓
[...] House price forecast 2009 [...]
I would broadly agree with your predictions. I am, however, noticing a decline in rental prices in south-west London in the past two or three months. This reflects increased supply - people are unable to sell and are letting their properties instead. It is also difficult to justify ever-increasing rental prices in the face of fast-declining property values. My own rent has only increased by inflation.
Further to my comments a while ago, it’s now clear that rental prices are in decline in London. Some media commentary is suggesting a 20% decrease. This is a natural response to increased supply caused by the inability of people to sell their properties. This is probably the only point in your original post where you seem to be a little off the mark.
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