House Prices set to be 10 Times Income

The unrelenting rise in UK house prices leaves many first time buyers faced with a situation of average house prices being up to 10 times average income.

The most general mortgage multiple by major banks is at the moment 5 times income. This mortgage lending is based on new criteria of affordable lending.

If a first time buyer wanted to get a mortgage equal to 6 times income, they would probably have to use a non conventional mortgage such as self certification mortgages.

To get a mortgage equal to 7 times income or more, it is likely a borrower would feel inclined to exaggerate income (lie) or save a huge deposit, or ask parents to ask as a guarantor.

The future looks bleak for future first time buyers as the high house prices are merely a reflection of demand being much bigger than supply. Why house prices have increased so much in the UK

To reduce house prices to affordable levels would require a big increase in the number of affordable housing being built. However, this is unlikely to occur given the restrictions placed on the building of new houses.

Another option in the long term, is to follow the example of Japan and use 50 year mortgages

• UK Housing Market
• The Future of house prices: 10 times income at the Times

Remortgaging: What happens if House prices Fall?

In the UK, the majority of homeowners have benefitted from significant house price rises. For example, the average house price has more than doubled in the past 5 years. (why house prices have increased so much) This means that many homeowners have the option to remortgage and gain greater equity withdrawal. This means they will gain a bigger mortgage against the value of their house price.

However, some are concerned that UK house prices could fall soon. This is because they are overvalued. Why House Prices may fall soon

If house prices fall, it could mean that those who remortgage are more susceptible to negative equity. Negative equity means that the value of the house is worth less than the mortgage. The real concern over this is that if you had to sell the house, you would still owe money on your mortgage. This might be a reason to delay remortgaging. However it is worth considering these factors:

Why House Price Fall is not a Bad Thing

1. If you remortgage your house to 90% of its present value, house prices would have to fall by 10% to create negative equity. Therefore, when remortgaging it is worth leaving a safety net of 5-10% to insulate against the prospect of negative equity.

2. If you have debts on higher interest payments it is better to pay off the debts remortgaging, rather than continue to pay the high interest rates.

3. If house prices do fall it may enable the MPC to reduce interest rates. This is because if house prices fall it will reduce growth and inflationary pressures. Therefore, the MPC will be able to cut interest rates. This will reduce monthly mortgage payments and make it easier to pay back. Falling house prices are only a problem if you have to sell your house. Also, it is worth remembering if house prices do fall, it will be cheaper to buy a new one.

4. The real problem for remortgaging is if interest rates increase significantly. This is because a higher mortgage leads to higher interest payments. If this is a concern you could get a fixed rate remortgage to insure against rising interest rates. - Interest rates will rise if growth and inflation are high.

Overall, the fear of falling house prices is not a reason to avoid remortgaging. Also, it is worth remembering that many house price experts have predicting the imminent collapse of the housing market for the past 5 years.

• Top 10 Tips for Remortgaging
  
• Why House Prices may never Fall
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Will House Prices Fall in 2008?

Are House Prices are Likely To Fall or Rise in 2008?

Reasons why House Price Fall is likely

1. House Prices have increased faster than Earnings.

House prices have risen at a very fast rate, therefore there are an increasing number of first time buyers, who are unable to buy a house. Therefore demand may start falling in the near future.

According to the Office of National Statistics, house prices in the past 10 years have risen by 204%, compared with a 94% increase in average wages. [1]

2. More people have taken Risky Mortgages.

To get on the property ladder, more first time buyers have taken out interest only, and self certification mortgages. Therefore, mortgage payments are a higher % of monthly income; this means homeowners are more susceptible to a rise in interest rates. Therefore, a small increase in interest rates can have a significant impact on affordability.

3. Interest Rates will rise due to Inflation.

The MPC have an inflation target of 2%. At the moment inflation is 3.1%, which is above target. Therefore, to reduce inflation, the MPC will need to increase interest rates. However, higher interest rates will make buying a house less attractive, because mortgage payments rise. Therefore, if interest rates rise to 6% as some commentators expect, house prices could fall.

4. Demand Tailing Off

Demand has been increasing due to Immigration and demographic factors; however, immigration is now slowing down. Therefore the demand for houses will start to fall.

5. End of Speculative Bubble.

Investors such as, foreigners and domestic buy to let, have been buying houses to try and make capital gains. However, the prospects for future capital gains are increasingly limited. Therefore, demand from this sector is likely to fall. If house prices start to slow down, or start to fall, demand will fall quite significantly.

Speculative nature of UK Housing Market - PDF

See also: Why house prices doomed to fall


Why House Prices will Continue Rising.

1. Shortage of Supply.

The reason for rising house prices in the UK is the fundamental shortage of supply. Demand has been increasing, at a relatively slow rate, but the number of new houses being built is at an all time low. It is very difficult to get planning permission to build houses in the UK. This is unlikely to change in the medium term, even though the government has pledged to increase the number of houses being built.

2. People are able to borrow bigger mortgages than before.

Getting a house is still a high priority, therefore, people are resourceful in borrowing larger sums than before, for example:

• Borrow from parents for deposit.
• Interest only mortgages
• Self-certification mortgage.
• 50 year mortgages.
• The 5 Times Income Mortgage
  

3. Real interest rates are low.

The independence of the Bank of England, since 1997, has led to a period of low inflation. Therefore long term interest rates are much lower than in the 1980s. This increases demand for mortgages.

4. The cost of Renting has increased.

Therefore, there is a clear financial incentive to try and buy.

5. Inflation not Real Problem

Inflation is only 3.1%, part of the last increase was a one off energy price rise, therefore, only a small increase in interest rates will be required to reduce demand.

See also:

• Why House prices may not fall, but keep rising

References

[1] Scotsman

• UK Housing Market

Shortage of Affordable Housing still Problem in UK

One of the main reasons for the recent rises in UK house prices is the continued shortgage of supply. When supply is limited it means that only a small increase in demand is required to cause prices to increase. This inelastic supply (supply doesn't change) also means that house prices are more volatile. i.e a small fall in demand for housing would also cause a big fall in price.

To combat the shortage of affordable housing the UK government has announced plans to increase the number of affordable housing available. Especially in the South East where the shortage is most acute.

However finding suitable locations for building houses is often a tricky local issue. Frequently building new houses clash with building on green belt land. Also local people often object to the possibility of increasing traffic and congestion associated with new houses.

See UK Housing Market


Redrow, one of Britain’s biggest housebuilders, said that the Government is not helping in its own plan to build more houses.

Mr Fitzsimmons said: “Disappointingly, the new planning guidelines appear to exclude low-cost open market housing from the definition of affordable housing. As a consequence, our ability to achieve our medium-term volume ambitions for Debut will depend on the response of local authorities to this new guidance.”

via: times

House Prices set to Fall by 20%

This is an interesting prediction made in 2003 (when I bought my own house, so I'm glad I didn't listen to experts)

An interesting article I picked up searching house prices on google.
Article from BBC predicting a house price fall of 20%, because house prices were fundamentally overvalued.

Between 2004 and 1993 House prices rose by more than 128% upto £154,503, compared to £65,025 in 1993. However since 2003 House prices have continued to rise. (roughly 20% increase)

In 2007 average house prices are now £184,924 source

Why UK house prices are not likely to fall

HOwever having said all that it is worth remembering they did get it half right. As house prices in America are suffering their biggest falls since the 1960s. Maybe the UK is next. Why house prices may fall

Higher House Prices increase likelyhood of Rate Rise in UK

Hometrack a property agent in London found that from a study of the UK housing market house prices in February rose by 6.4 per cent in the year to February. In January house prices rose by 6 per cent in January. This is the fastest rate for more than 3 years. The MPC place great importance on rising house prices because usually rising house prices lead to greater consumers spending and therefore increase inflationary pressures.

The main reason given for house prices rising was a continued shortage of supply. With demand for housing rising faster than supply it pushes up prices.

The average house prices is now £172,000 pounds well out of the reach of many first time buyers, but still many buyers in the market are not being put off by these high prices.

Bloomberg

Is now a Good time to Buy a House in UK

With House prices in the UK rising well above the rate of inflation. There are some in the industry who suggest that now is not a good time to start buying. Furthermore there are various disadvantages associated with home ownership. See these
Disadvantages of buying a house

However although house prices may be overpriced, in the long term there is a good chance that buying a house will prove to be a good investment. Furthermore buying a house is not wasted money. It enables you to some day purchase a house outright, pay of f the mortgage and be able to live rent free in your retirement.

Advantages of Buying a House in UK

Will House Prices fall in the UK?

The "Harry Potter" Effect on House Prices

It seems that Harry Potter can work his magic even in the UK housing market. Studies have shown that in towns, associated with Harry Potter and the Potter films, prices have risen well above the national average. For example in Alnwick, where the first film "The Philosophers Stone" was made in 2001. There prices rose 51% in 2001 alone. . A total of 226 properties were sold in the small town that year. Information released by aboutproperty.co.uk

Towns that have been associated with films and TV series have often attracted a good deal of tourists. People may be cashing in on the opportunity to turn houses into B&B's

This is not entirely dissimilar to the effect that good schools can have on house prices

Pre order Harry Potter at Amazon