Predicting house prices in the UK has become so unpredictable, many analysts are increasingly reluctant to give any predictions for more than six months hence. Nevertheless, if you are willing to stick your neck out and make a strong prediction, it is a good way to get news coverage. Any dire prediction of house prices is usually gobbled up by the media and the home-owning society that is the UK.
Capital Economics, the consultancy led by Roger Bootle, expects house prices to fall 5pc this year, and 10pc in each of 2011 and 2012.
They base their predictions on:
Why House Prices Will Fall
- Number of sellers is starting to exceed buyers, putting downward pressure on prices.
- Interest rates, currently at record lows, are likely to be rising in 2011 and 2012. This will come as a shock to homeowners who have got used to record low mortgage rates.
- Fiscal Squeeze and dangers of double dip recession. The government have announced plans to cut spending from 2011. This will lead to job losses in the public sector and negatively impact on economic growth. With unemployment still very high this will lead to more homeowners struggling to pay and so will put property on the market.
- House prices are still overvalued by long term data such as house price to incomes ratios.
- New criteria for mortgages makes it much harder to get. New home owners are increasingly have to save a larger % of their house as a deposit. (though there are some promising signs of a thaw in mortgage conditions. Though I feel if house prices were to reverse, banks would return to being risk averse and be reluctant to lend without large deposits.
It is certainly a grim forecast, and there is sound reasoning to support such as scenario. It would also mean the UK following the trend set by US and EU countries such as Spain.
Yet, it may still be worth bearing in mind.
Why House prices may not Fall
- The worst of the recession may be over. It is hard to see a recovery as being anything other than slow. However, at 2.5 million unemployment may have peaked, and could slower recover, as long as recession doesn’t continue.
- Low Interest rates may remain. Given the fiscal squeeze, it is more likely the Bank of England will be able to keep interest rates at record lows.
- A rise in base rates may affect mortgage rates less than expected. With base rates falling to 0.5%, many banks failed to pass the base rate cut onto consumers, preferring to increase their profit margin and encourage savings. If base rates did rise, the impact on mortgage rates would certainly be less.
- The number of sellers may fall if house prices fall. We are certainly not going to have a boom in house supply over next couple of years.
Related
- Historical house prices UK
- Housing Market at Capital economics
- See our predictions on house prices and mortgage interest rates for 2012.
This is really interesting to know. I think that this theory has been recognised for a while and there are many contributing factors which could exaggerate this affect.
I feel that in the next 10-15 years, house prices will generally continue to rise, due to a rising population and hence an increased need for housing. In the short-run, you are certainly right that a double-dip recession could hit the housing market hard. The cuts to the public sector could well lead us into this.
The way i see it, is that interest rates have to rise eventually. This will obviously cause a lot of people who have got variable rate mortgages to struggle with their payments. This will push people to sell, creating more houses being sold than there is buyers. Again this will add to the fall in house prices. I believe this will hit hard for anyone who has bought in the last few years who is on or going to be on a variable rate mortgage.
I believe yes, house prices will fall further!
Well, we just need to wait until the full economic recovery, if you can wait…
Houses will probably fall. Interest rates will increase making it harder for first time buyers and current buyers to keep up with payments. Although I don’t expect houses prices to be any different now than in 10 years time.