It’s a bizarre situation when in the aftermath of a prolonged recession, UK house prices manage to increase 10%, despite being fundamentally overvalued.
Rising house prices do have certain benefits, especially in the short run. The rise in house prices creates a positive wealth effect encourage householders to spend. Falling house prices would have prolonged the depression in consumer spending. The rise in house prices will also be welcomed by a fragile banking sector worrying about the combined effect of negative equity and home repossessions. But, although the rise in house prices gives a short term benefit. In the longer term, overvalued house prices present various problems.
- Rising House prices have a history of encouraging reckless borrowing and householders to overstretch themselves. Rising house prices was a significant factor in encouraging a rise in personal borrowing which is now unravelling. At the moment, there may seem little threat of a potential repeat of this. But, if house prices continue to rise, it could again destabilise the incentives to save and borrow.
- Inequality. Rising house prices is simply good news for those fortunate enough to own a house and bad news for those who don’t. It is very difficult for young first time buyers to get on the property ladder. Effectively we have a property market with very little fluidity. Unless you have help from your parents, the options of buying a house are very limited.
- Overvalued. As we mentioned in a previous post, house price to income ratios are still overvalued. When house prices are overvalued there is always the threat of a correction and a fall in house prices which is destabilising to homeowners and the economy. For example, a rise in interest rates or house building programme could cause house prices to fall. What is needed is a period of stability, not volatility.
- Rising House Prices Caused by Shortage of Houses. The rise in house prices does not reflect an underlying strength in the economy and amongst homebuyers – it is more a reflection of the shortage of supply. Prices are being squeezed higher because of limited supply. This means that house price rises are less sustainable.
- Lower Geographical Immobility. Rising house prices makes it more difficult to move. This means it is harder for people to move around the country – especially to hotspots like London.
First time buyers up to £250,000 out of the market and average house prices go up, what do you expect.
Average house prices mean nothing.
I find rising house prices a problem. My first buy was a flat in 2007 but now I want to start a family with my wife so we need a house. Being able to afford this is impossible as the house prices have rised so much but there is not much demand for flats in my area.
We are saving our money as best we can and hope to be moving into a house within the next 2 years
It does seem crazy that house prices are rising. With mortgages still difficult to get especially for first time buyers who need a huge deposit life is still very difficult for people getting on the housing ladder.
The banks seem to want things all ways round, government handouts to bail them out and then saying they dont have enough capital to actually provide mortgages. But they still have enough money to pay big bonuses. personally I would nationalise any bank that needs a handout form tax payers and make them provide more loans and mortgages at realistic terms.
House prices are well over priced even more so in london. First time buyers are going to strugle getting on the ladder unless a very big deposit is saved. The problem in times like this who can save money? I say thank god for low interest rates other wise we would sink. Who is to blame for such high house prices Banks ? estate agents rode it till the wheels fell off !property prices was raised as much as they could possibly achievable, Playing people against each other the banks was’nt exactly against the idea valuations should of be governed better, estate agent played buyers againt one an other to raise prices. How can life style be built around loans. example: nice car, bigger expensive homes, home improvments, holidays, cloths, home entertainment. how was all this funded ? money saved or credit cards, high mortgages, home equity deals, car creadit? It got way out of control WHY ? because the FUNDS were so easily reached. The bigger problem is now unemployment is on the up and will need funds untill we are out the mess we are in, doors are closed funds will be impossible to reach..