Long Term Forecasts for UK Housing Market

The housing market is facing acute short term difficulties. In particular:

  • Drop of mortgage lending (there has been 45% fall since this time last year) has caused a big fall in demand for housing. It means that potential homeowners, especially first time buyers are finding it very difficult to get a mortgage. If this freezing of the mortgage market continues, house prices are liable to fall quite significantly.
  • A good question is how long will the mortgage crisis last? The Bank of England has attempted to inject liquidity by offering £50bn of government securities; they even promise up to £100bn. However, there are signs that this is not creating extra finance as hoped. Most banks have still not passed on the lower rates. There are also fears that the full extent of the subprime losses have not been accounted for. Therefore, some feel the situation will get worse before it gets better. Nevertheless, over time, lending in the mortgage markets is likely to improve (even if it doesn’t get back to 2006-07 standards). It is in the banks interest to resolve the shortage of mortgage funding. There is demand for mortgages and they should be profitable for banks if they can sort out the issue of raising finance.

Long Term Interest rates.

As house prices slow, the economy will also slow. This should enable cuts in interest rates. This is complicated by a rise in cost push inflation. However, these cost push factors (such as rising oil, food and energy prices) are liable to be short term. It is unlikely that commodities such as food will continue to rise at their present rate. Oil prices may remain high over $100 a barrel, but to maintain the present annual increase in prices, would be very unlikely. In the medium term it is unlikely that we will see a significant rise in interest rates; it is more likely that interest rates will be slightly lower than the current 5% rate. Therefore, borrowing for a mortgage will remain relatively attractive compared to renting. The long term affordability of mortgage payments is below historical peaks in 1991. As a % of disposable income it is not unreasonable to predict that demand for mortgages will remain strong amongst the UK population.

Average House Prices to Incomes Ratios.

Looking at average house prices to income ratios provides the most convincing argument to suggest that house prices are fundamentally overvalued and could fall by upto 45% (as some have been predicting for past 5 years.) House price to income ratios are currently 5.0 as opposed to 2.7 in 1970 (house price income ratios)

There is certainly a decline in affordability, especially for first time buyers. However, there is no obvious necessity for house price to incomes ratios to fall to levels seen in the 1970s. This is because:

  • Supply constraints in the UK still exist. America has seen a fall in demand and a corresponding rise in supply of houses. This has left a record number of houses unsold and therefore prices have plummeted. However, at the moment, the UK doesn’t have this situation, the number of new houses coming onto the market is close to a record low. Whilst supply of housing is below the number of households, it puts upward pressure on house prices; it supports an increase in the long term house price / income ratio.
  • Medium term interest rates are historically low. The last house price crash came when interest rates were in double figures for several months. This made mortgage prohibitively expensive. But, with rates more than half, paying for a mortgage still remains an attractive option. in Q3 of 2007, mortgage interest payments accounted for 20% of disposable income, as opposed to 27% in 1991. (links)
  • Parents Money. To deal with rising house prices, many parents are offering deposits to their children. This is effectively increasing the buying power of first time buyers. It is also creating a situation of inequality, where getting on the housing market is becoming dependent on whether your parents will help you out. This is fair, but, unfortunately leads to a situation where people are willing to pay more for a mortgage.
  • Rising Number of Households. The UK has a rising population, boosted by immigration. Social trends are also encouraging smaller household sizes, e.g. rising divorce rates.

The next two years is likely to see falling or stagnating house prices. However, in the long term, I still expect UK house prices to remain high. A long term decline in house prices would only occur if:

  • The mortgage crisis became a permanent. i.e. restrictions on lending were maintained for several years.
  • Significant increase in supply of housing. In the current climate and with the UK’s tight planning permission, this is unlikely to be resolved in the near future.
  • Decline in population. It is said Eastern European immigrants are already fed up with the UK and are starting to return. It is not unfeasible that the UK’s population could start to decline in the medium term; this would definitely undermine house price growth.

Long Run Forecast for UK House Prices.

It is quite feasible that average UK house prices could reach £300,000 in the next 10 years. Such a prediction is bound to inflame those with an emotive attachment to the idea of a massive house price crash. One sometimes feels like a heretic for not agreeing wholeheartedly with the doom mongers. But, in 1992 with house prices having fallen 15% in a year, who would have predicted average house prices would rise to 200% in the next decade?

Long Term Forecast for US House prices.

I can’t see US house prices increasing for much longer

One thing is certain, the UK housing market will continue to provide plenty of room for argument and discussion…

See our predictions on house prices and mortgage interest rates for 2012.

12 Responses to Long Term Forecasts for UK Housing Market

  1. Ed June 2, 2008 at 9:04 pm #

    The news from Bradford and Bingley today wasn’t great for the UK housing market. It signifies that the buy to let market is crumbling. There are other factors that could also significantly affect the UK housing market if unemployment rises. this was really the key to the previous crash and will be the same this time. If unemployment rises, the transient inward bound migrants will move to better climes such as Germany. We’ll have to wait and see!

  2. pilagging pension funds December 7, 2008 at 12:52 pm #

    U K is the weakest economy ,least productive workforce and an economy in dire straits

  3. scib February 12, 2010 at 6:45 pm #

    You only talk about lending and higher house prices, you don’t mention how people are supposed to borrow ever increasing amounts. No doubt lending criteria will change (again) and we’ll end up borrowing more than we can afford and end up exactly where we are now.
    This article is all about lending more money, coz the more you lend, the more profit the finance people make.

  4. Jessica Williams July 3, 2010 at 2:16 pm #

    An important factor that this article doesn’t mention is buy to let – which now comprises a material component of property purchases in the UK. Buy to let investors are often cash rich as they are able to take equity out of their existing portfolio to finance new purchases. While returns on buy to let investments outperform other asset classes we can expect to see rising house prices.

  5. Online Estate Agents August 27, 2010 at 5:07 pm #

    There simply aren’t enough first-time buyers coming onto the market – due to tough credit conditions.

  6. Doctors Mortgages September 12, 2011 at 10:38 am #

    Mortgage supply has increased over the last year and this will inevitably lead to housing market growth in the future.


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