2010 has been a rough year for the economy and housing market, but it could easily have been a lot worse.
Euro member countries like Spain, Ireland, Greece and Portugal are all facing serious economic crisis. They are facing budget cuts without any corresponding loosening of monetary policy and depreciation in the exchange rate. These countries are also experiencing a real crisis in their housing market. Excess supply, combined with a weak banking sector are pushing prices lower.
In some ways, the UK was hit much harder by the Credit crisis, but, two factors have insulated us from the problems Ireland are facing.
Firstly, we don’t have a surplus of housing stock built in the boom. Thus, although mortgage lending is still very low and demand weak, we don’t have a large excess stock of unsold houses driving prices lower. This has helped stabilise house price falls. This doesn’t mean the UK housing market has returned to robust health. But, it has helped prevent an even bigger collapse in prices, which would have caused more instability.
Secondly, by staying out of the Euro, we have been able to pursue independent monetary policy (Q.E.) and allow the Pound Sterling to depreciate by 25%. This depreciation has enabled a boost in manufacturing, helped by external demand. With a lower exchange rate and loose monetary policy, it means the UK economy has a better chance of shaking off government spending cuts, and economic problems in neighbours like Ireland.
Where does this leave the Housing Market for 2011?
Given unpredictable nature of economy and housing market, analysts are more reluctant to predict house prices for 2011. However, a consensus seems to suggest house prices will be stagnant. Neither strong demand to push them higher. But, with continued low interest rates and this shortage of supply, further house price falls are less likely.
Some don’t agree. They argue, UK house prices are still overvalued and given weakness of mortgage sector, a weak economic recovery could push house prices much lower in 2011. In particular, if interest rates do start to rise because of Q.E. induced inflation, this could make many people struggle to pay their mortgage.
However, I feel at the moment, it is hard to see interest rates rising. Despite inflation being above the inflation target, the economy is still weak and the Bank of England will be nervous about the negative impact of fiscal austerity on the economy.
I agree that with the economy weak interest rates are unlikely to rise in 2011, and even if they do it is likely to only be a token amount.
However my guess would still be for small falls in house prices, just because I can’t see anything really supporting the current price levels (except a very slow market).
A significant fall is unlikely because most people can comfortably afford their mortgage, sit tight and enjoy the low interest rates (and inflation at 3%+).
Nationally, house prices seem to have returned to something like trend, and while prices can always shoot to the downside as easily as the upside, I’d probably buy if I lived in Sheffield or Cardiff, say.
In London though, they just don’t seem to have corrected to the same degree. I still expect further falls, but perhaps it’s wishful thinking.
No Doubts, this is good one on housing market . Keep up the good work. Thanks buddy.