Will House Prices drop in UK?

 

 

 

Why The Fall in House Prices will be Moderate

Despite commentators predicting an imminent house price crash (and some have been predicting it since 2002) the UK housing market remains resilient. Depsite falls in house prices, many argue that predictions of a house price collapse are misplaced and prices are likely to remain high in the long term.

There are various reasons why house prices could be sustainable and in fact are not overvalued as many commentators predict. The house price to earnings ratio is increasing. (50% above the long term average). Many see this as a reason for house prices to fall. However, this need not be the case.

Why House Prices May Not Fall Very Much

  1. More Flexible Mortgage Lending New longer more flexible mortgages means people can still afford the mortgage interest payment. E.g the old formula of 3* salary and 25 years is no longer as common. Increasingly banks are willing to lend for 50 years and much bigger ratios to average house prices. However, the credit crunch has changed this significantly. Currently, there is a drastic shortage of mortgage funds and this is pulling house prices lower.
  2. Supply constraints are likely to remain. The UK suffers from a chronic shortage of housing, especially in London and the South East. The Government has promised to build more, but it would be a long time before the results are actually seen.
  3. Rising Price of Renting. With the price of renting rising as well, it still makes sense for people to borrow as much as they can to get on the housing market.
  4. Housing is a luxury good (demand is income elastic) Therefore as incomes rise people tend to want to spend a higher % of their income on housing.
  1. Long term interest rates are likely to remain low. One of the biggest factor behind the rise in demand for housing is the period of low interest rates. This means it is more attractive to borrow. For the foreseeable future, long term interest rates are likely to remain low compared to historical standards. One reason for this, is the lower inflation levels we experience around the world at the moment. With improved technology and increased competitiveness from globalisation low inflation and low interest rates are likely to remain.
  1. Increasing number of households. Due to a combination of immigration and changing social trends (e.g. divorce) there is a growing number of households. Often the number in a household is falling as well. Therefore this keeps demand buoyant.

 

The opposite argument. Why House Prices are falling

 

Blog entries on:UK Housing Market

References

FT house price survey