House prices have fallen 15%, and the reasons for falling house prices remain pretty strong. In fact, falling house prices have created their own momentum discouraging people to buy, causing prices to fall even more. It is negative downward spiral. Falling house prices discourage people from buying. – Because few want to buy, the drop is exacerbated.
Other Reasons for falling house prices include:
- Continual problems in money markets. The collapse of investment banks like Lehman Brothers causes further shortages in lending, making the mortgage draught continue.
- Impending Recession and rising unemployment discouraging from people from buying a house
Savills stuck their neck out recently and said that after falling 15% in 2009, house prices will recover sharply in 2010. This is because, the credit crisis has not resolved the fundamental disequilibrium in the UK housing market. Demand for homes is still growing faster than supply. The credit crisis has actually caused a fall in the building of homes. The main problem is that currently people can’t get mortgages. When the mortgage industry returns to normal, pent up demand will cause prices to rise sharply.
If house prices drop 20%, buying a house will make much better economic sense than renting, even if house price to incomes ratios are relatively high.
This scenario would mirror the boom and bust of the early 1990s. In the UK house prices fell 25% before staging a remarkable recovery in the late 90s and early 2000s. (historical house prices)
The other scenario is that the UK follows the Japanese asset price bust of the 1980s and 1990s. In the 1990s, Japan suffered from falling asset prices and house prices have never recovered. The argument is that house prices are still unaffordable when comparing price to incomes ratios. If banks tighten up lending and keep to strict lending criteria demand will remain subdued. Therefore, even with a shortage of supply, there will be too few buyers to push up prices. Also the coming recession and rising unemployment will further reduce demand for homes and increase the number of repossessions. This will lead to greater bank losses and further potential problems on the financial markets.
My feeling is that due to intense difficulties in the financial system, mortgages will continue to be rationned (despite recent reductions in bank rates) As house prices fall, people simply don’t want to buy; it makes sense to wait at least, until house prices stop dropping. Therefore, 2009, will see further falls in house prices. But, I don’t think the credit crunch will alter the desire of British people to want to buy a house; it will certainly not solve the long term shortage of housing. Therefore, come 2010, we could experience the whole rollercoaster experience all over again.
It may seem odd to start forecasting rises in house prices during the current financial turmoils, with major British banks becoming illiquid. But, in 1993 after the collapse in house prices, who was predicting house prices would soon rise 200% ?
This doesn’t mean it is a good thing if house prices rise again. Ideally, we would seek to avoid the continual boom and bust in the UK housing market. But, if you have a population forecast to rise to 71 million and supply constraints to remain, the scope for another boom in house prices will remain.
I feel that we are more likely to see a repeat of the UK 90s scenario than the experiences seen in Japan. I think the key difference is that people are still flooding into Britain. Look how many HMO’s are booming in our cities!
Supply and demand only explains part of the house price rises. The rest is purely due to speculative investment (eg. Recent oil price movement). So far Australia has avoided the bust. Young people here cannot hope to afford housing. The long term impact of this will change our society, probably for the worse. The only solution is what was done in the UK after WW1. That is, for government to build enough public housing. The bubble must be burst and this will cause short term pain for some. The alternative is civil unrest if let go (eg. Rent Strikes, Mortgage Slavery, Slum Lords).
I have to agree with Matt’s comment it is all about supply and demand, its great that over there that government does build decent public housing unlike in other parts of the world but the markets and finances have to recover as well in order people to be able to afford housing again they have to get out the huge mass of debit they have incurred.