Should we worry about falling house prices?

What happens when house prices fall:

Conventional wisdom suggests that falling house prices would be a disaster for homeowners and the economy. For example, a 10% fall in house prices could knock £20,000 of the average UK house price. Such a fall in wealth is likely to reduce consumer confidence and spending. This fall in spending will feed through into lower growth and possibly cause a recession. Many homeowners remember the last recession of 1992 when house prices fell by 15%

However, falling house prices are not necessarily the end of the world (as maybe the Daily Mail would like us to believe :))

• Firstly the recession of 1991 was really caused by interest rates of 15%, rather than falling house prices.
• Falling house prices enable lower interest rates, this is good news for those who have stretched mortgage spending
• Falling house prices will help address the issue of affordability. Many first time buyers struggle to get on property ladder creating divisions within society.
• Falling house prices do not necessarily cause a recession.

See Full article on the Effect of Falling house prices in UK

London Housing Market

The London Housing Market has often set the tone for the rest of the UK housing Market. Price rises in London have often percolated to the rest of the country. However, certain features of the London Housing Market make it unique to the rest of the country. These reasons explain why the London housing market is more volatile than the rest of the country and also why house prices are higher in London.

For in depth look at the problems of the London Housing Market

Why London House Prices are expensive and volatile

1. Increase in number of households from 2.4 million 1975 to 3.1 million 2013 (est)
2. Rise in net migration from overseeas (recently from Eastern Europe - Poland, in particular)
3. Prestige of London Financial Centre
4. Large bonuses paid by London Finance companies in recent years. (such bonuses are not typical of rest of country
5. Shortage of supply. New housing accounts for only 0.5% of total housing stock.
6. Falling unemployment in London.
7. Desirability of living in Capital
   

UK Housing Market

Mortgage Approvals in 2007 fall to new low

Evidence of a cooling housing market increased yesterday, there is evidence that the number of new mortgage approvals has fallen quite sharply.

The Bank said the number of approvals - loans for house purchase agreed but not yet made - fell to 111,000 from a downwardly revised 117,000 in February.

That was the lowest since April 2006 and well below forecasts for a reading of 117,000.

Nevertheless, housing date from March, suggests that house prices continue to rise at a double digit rate. The main reason for the increased house prices is the continued shortage of supply in the UK housing market.

Despite the decline in mortgage approvals base rates are still predicted to rise, when the MPC next meet. This is because inflation is currently above the governments inflation target of CPI 1 - 3%. However, this next rise in interest rates may further reduce demand for mortgages. Therefore, over time the interest rate rises are likely to reduce inflationary pressures; this means that interest rates may soon be peaking.

UK Housing Market

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

Buy to Let Mortgates - Increasing Demand.

Despite uncertainties over the future of the UK Housing Market, the buy to let sector is forecast to continuing increasing in size.

Currently about 330,000 buy to let mortgages are sold per year in the UK, this is forecast to rise to £361,000. By 2011 Mintel forecast the % of buy to let mortgages to rise to 550,00 per year; this will account for 10% of the mortgage market.

Since the early 1990s the buy to let market has been booming and outperforming the standard mortgage market.

Reasons for Increase in Buy to Let Mortgage Sector

1. Housing seen as a good investment for retirement. Housing provides both income and capital gains, in recent years the housing market has strongly outperformed other investment options like the stock market.
2. People using Capital Gains to reinvest. The rise in house prices mean many homeowners have seen large increases in wealth. This has enabled them to remortgage and buy a second home.
3. Increased willingness of Banks and building societies to lend
   
4. Lower Real Interest Rates making buying more attractive.
5. Increased Difficulties for First Time Buyers. The increased cost of UK housing means many first time buyers are being pushed out of the housing market, therefore, there has been a buoyant demand from the renting sector. This has maintained the profitability of the buy to let market

• Buy To Let Mortgages
• Prospects for Buy to Let
  

Mr Davies added: "The buy-to-let mortgage market has experienced meteoric growth since the late 1990s, outperforming the wider mortgage market over the past few years.

Is the UK Property Boom over?

Prospects for UK Housing Market and Buy to Let Sector.


For the past 3 years some commentators have been predicting the imminent collapse of UK property prices the Buy to let sector.

Because house prices are rising faster than both average earnings and now rents, the economic fundamentals behind the strength of the sector are starting to decline. However despite concerns there are some reasons to be optimistic

Strengths of Buy to Let Sector.

Mortgage defaults are lower in the But to Let sector than other areas of the Housing market. The proportion of buy to let mortgages 3 months in arrears is only 0.59% lower than 2006 and lower than the average for the UK housing Market 0.89%

Continued shortage of housing is pushing up prices of renting. Not by as much as house prices, but the strong demand for the rented sector means that the amount of time when the house is not occupied is much less.

Foreign workers continue to move into the UK from the EU. This is another factor strengthening the renting sector of the housing market.

Relatively low real interest rates (real interest rates = nominal interest rates – inflation. It is a more accurate guide to the real cost of borrowing). Despite 3 rises in interest rates in the past 6 months real interest rates are still quite low, especially if the old RPI measure is used for measuring inflation.

Weakness of Buy to Let Mortgage Sector

Rental yields are falling because of the rampant house prices inflation.

Banks are making it easier to get a buy to let mortgage through relaxing the rental yield returns. Alliance & Leicester for example require only rental yields of 100% for some buy to let (traditional return is 130%). This makes an increasing number of buy to let mortgage susceptible to a rise in interest rates.

Interest rates in the UK are still predicted to keep rising because of the underlying strength of the consumer sector and consequent inflationary pressures.

New licensing regime for renting. This makes landlords hand over tenant deposits to government 3rd parties. There are also more restrictions on the quality of the rented sector.

UK Housing Market
source for stats

What is Gazumping?

Gazumping occurs when you have put in an offer to buy a house and at the last moment someone comes on with a higher offer. Legally the owner of the house has the right to change his mind and sell to the highest bidder. However it can be a frustrating business because the process of buying a house can be very slow, meaning that rising house prices encourage people to increase their offer at the last moment.

With many £1000s at stake it is worth considering various things to prevent gazumping.

See more on Gazumping in the UK Housing Market

UK Housing Market

Mortgage Equity Withdrawal UK 2006-2007

Current Trends in Mortgage Equity Withdrawal UK 2006-2007

Mortgage equity withdrawal has increases significantly in the past 6 years. In 2000 MEW accounted for just under 2% of personal disposable income. In 2003 this shot up to 9% of personal disposable income (£18bn). After a fall in the growth during 2004, MEW has again picked up in 2006. Bank of England



These trends in MEW are very closely tied to the performance of the UK housing market and also interest rates. The peak in 2003 a reflection of the historically low interest rates.

Prospects for Mortgage Equity Withdrawal in the UK.

There are fears that the UK house prices are overvalued. If house prices were to fall then it could lead to a significant fall in MEW. Also the recent rise in interest rates have made re mortgaging less attractive; the prospects for future interest rate rises remain.

See more on: Mortgage Equity Withdrawal

To what extent does the Housing Market Effect Interest Rates?

Recently the governor of the Bank of England admitted UK monetary policy may have been responsible for encouraging a consumer credit boom and also boom in house prices.

With many commentators arguing house prices are overvalued (House prices set to fall) a good question to ask is why didn't the government and MPC do more to reduce the housing boom? e.g. they could have increased interest rates earlier to prevent house prices rising too much.

In short the answer is that interest rates are used to meet the governments inflation target. The housing market is not a direct objective of monetary policy.

The other reason is that the underlying reason for the rapid increase in house prices is the fundamental shortage of supply. Because demand is fundamentally greater than supply using interest rates to reduce house prices doesn't tackle the fundamental problem in the housing market.

To be fair to have prevented rapid house price inflation interest rates may have needed to be quite a bit higher, this could easily have contributed towards a downturn in the economy.

For more details See: Effect of Housing Market on Interest Rates

• UK Housing Market

Inflation Increase increases Prospect of Future Rate Rise

The UK CPI measure of inflation rose from 2.7% to 2.8%. The old rate RPI, which includes the cost of council tax and mortgage interest payments rose to 4.6%. Many feel this RPI measure is a more accurate reflection of individual living costs. On this basis real interest rates are quite low. - only 5.25% - 4.6% = 0.65%. Therefore it is quite possible that interest rates could rise significantly to reduce consumer spending. Those with mortgages could see a significant increase in their cost of living.

However although many people's cost of living is rising by 4.6% or greater, wages are rising comparatively slowly as they are based on the more conservative CPI measure of inflation. Thus rising interest rates would squeeze household's disposable income further.

Recently the governor of the Bank of England admitted they had helped to cause a consumer boom in the UK. He said low interest rates had been necessary to stave off a global slowdown. However it had the unfortunate side effect of boosting consumer spending and causing a house price boom.

This suggests the limitations of Monetary policy in dealing with various objectives at the same time.

• UK Housing Market

Prospects for Buy to Let UK

In the Short term the buy to let sub market is performing well.

1. Uncertainty over the direction of house prices and interest rates is discouraging more people from buying at the moment. This is increasing demand for alternative renting.
2. Shortage of Supply. Recent studies show there is a chronic undersupply of houses in the UK. This is keeping prices for renting and buying high.
3. Immigration and oversees buyers is increasing demand for houses, even though UK first time buyers are being priced out of the market

However in the Long Term there are concerns about the prospects for the Buy to Let Market

1. House Price to earnings ratio has increased so much that it is difficult to justify continued rising house prices. Many experts argue house prices in fact are fundamentally overvalued. See house prices will fall.
2. Inflation in the UK is at the higher end of the governments target. If global inflation starts to increase due to rising commodity prices this could mean higher interest rates in the medium term. This would eat into the profitability of buy to let and therefore could lead to falling demand.

Defaults in UK and US Mortgage Industry

Is the UK mortgage industry likely to experience same problems of debt default as US mortgage industry?

Defaults on American mortgages have been making headline news recently with a record number of defaults; up to 4.95%. For the sub prime market this rate of defaults has reached 13%. Some are concerned that there are similarities between the American housing market and the UK housing market and in the future the UK could experience a similar level of defaults. However it is worth pointing out that there are differences between US mortgage industry and UK.

1. The number of 100% mortgages is much lower in the UK. 100% mortgages are quite rare, especially in the bad credit or sub prime sector. In the US 50% of sub prime mortgages were 100% mortgages

2. UK mortgage dealers are generally more risk averse. Even for self-cert mortgages there is more checking of income than in the US. See dangers of sub prime mortgages.

3. House prices are not falling. In the US many now have negative equity with no possibility of Remortgaging. Some believe the UK housing market is overvalued, however it is worth remembering that supply constraints in UK the may enable house prices to keep rising. see house prices to keep rising

4. Interest rates in the US have shot up sharply. US interest rates have increased from 1% to 5.25%; this is the main reason for loan defaults in the US. Interest rates have risen by more than people expected. In the UK interest rates move much more gradually. E.g. in the last 8 months there has been 3 increases of 0.25%

5. In the UK fixed rate mortgages are more common than in the US. These give additional security against rising interest rates.


However it is worth bearing in mind that

1. UK house prices could fall. The house price to earnings ratio is at an all time high and it has made it difficult for first time owners to buy. House prices could fall

2. UK consumers have a high % of indebtedness. This makes them susceptible to any future rise in interest rates.

3. The sub prime market in the UK is likely to grow. Figures by Datamonitor show 9.1 million people of working age were refused credit by mainstream lenders during 2005. In 2010 this figure is predicted to rise to 9.4 million.


Reference

Independent

Will Mortgage defaults cause a recession in the US?

Will an increase in Mortgage defaults cause a recession in the US and rest of the World?

At first glance it seems a relatively small problem. Within the US sub prime mortgage markets there has been an increase in defaults to 4.95%. The sub prime mortgage is a growing but still relatively small section of the US housing market. Nevertheless there are worries that this small incident could cause a negative multiplier effect and could push the US economy into recession. Furthermore although the US economy is not as dominant as it used to be. There are still legitimate fears that a US slowdown could spread throughout the world economy.

Why Mortgage Defaults and Problems in the US Housing Market can cause a Recession

1. Bad Debts for Banks. Mortgage defaults are costing banks and lending institutions significant sums in debt they have to write off. For example HSBC recently had to write of $10.5bn in bad debts from the US sub prime mortgage industry. This contributed to a fall in HSBC share price. Also leading financial institutions are re-evaluating their attitude to risk. Now defaults are growing and house prices are falling they are much more reluctant to lend to what they consider risky investments. The effect of this is to reduce investment levels and therefore reduce the rate of economic growth.
   
   
2. Loss of Confidence. The impact of consumer confidence on the economy should never be underestimated. In recent years the US economy has been buoyed by consumer spending, often financed by high levels of borrowing and rising house prices. As house prices fall and bad economic news makes the headlines; consumers will reduce spending, borrowing and increase savings. This will lead to lower AD and therefore could cause lower economic growth.
   
   
3. Negative Multiplier Effect. The multiplier effect relates to how a problem in one economy can spread throughout the rest of the economy making the initial problem worse. For example the sub prime mortgage may only affect a small % of the population, but if those facing higher debt payments reduce their spending it effects other shopkeepers and firms. Therefore with less income coming in they may reduce their employment levels causing a further fall in AD and this negative spiral can increase (especially when confidence is low)
   
   
4. World Recession. The US economy has been a major factor in determining economic growth in other countries. For example the US has been buying a high % of Chinese exports. If the US economy were to go into recession many countries would experience a fall in exports and therefore fall in economic growth as well. This could be exacerbated if there is a continued fall in world stock markets. However it is worth noting that the US economy is a smaller % of the world economy than it used to be. There is a growing Chinese and Indian middle class who make take up the slack in global demand.

See also:

• Is US heading into Recession?
• More defaults on Sub Prime Mortgages in US
  

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

Rising House Prices increase revenue from Stamp Duty

Nearly 20% of all home are valued at greater than £250,000. This means that purchasing these properties incurs a stamp duty of 3% rather than 1%. This was published in a report by Halifax Bank, Britain's biggest mortgage lender

There are also 600,000 homes - 3 per cent of the whole market - valued at £500,000 or more. Buyers of these homes must pay stamp duty at the highest rate of 4 per cent.

The rapid increase in house prices has led to a windfall for the Treasury. In 2006 the Treausry received £4.6nb in stamp duty up from £2.1bn in the previous financial year.

With the IMF recently criticising the UK for an increasing budget deficit it is likely the UK government will be reluctant to increase the value of stamp duty in line with inflation.In 1996-97, the tax raised only £675m.

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

Stock Market and the Housing Market

The US has recently experienced significant falls in the value of shares. After 12 months of solid growth in share prices. Suddenly US investors are realising the economy faces underlying weakness.

Part of the sell off came from even bigger falls in China. With the US economy increasingly dependent on Chinese capital flows a fall in the Shanghai index causes a knock effect on American investors. The problem is that America's huge current account deficit is being financed by mainly Chinese investors buying up US Securites. At the moment China is willing to keep up the purchase of US assets at cheap rates. This enables US interest rates to remain low. However if the Chinese were to stop buying US debt there would need to be a significant devaluation in the dollar and / or higher US interest rates.

However weakness on the Chinese stock market is not the only reason for Worries in the US. THe US housing market is very weak at the moment. Home building has slumped and house prices are starting to fall. Furthermore there are worries about the lending of bad debt to people with poor credit histories. Because of the weakness of both the US housing Market and US stock market there is a growing fear that the US may be entering into a period of recession by the end of the year.

Alan Greenspan says the threat of recession is now a "possibility"

"By the end of the year, there is the possibility but not the probability of the US moving into recession." He has argued this week that corporate profit margins appear to be narrowing, indicating that a recent economic expansion has reached a "mature phase".

- via

Events in US and the rest of the world could also feed through into the UK housing market and economy.

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

US Mortgage Dealers going bust in record numbers

The fall in US house prices is having a knock on effect on the US economy. With house prices falling it is causing a fall in consumer confidence and consumer spending.

"Nouriel Roubini, economics professor at New York University, says the housing bust is slowly pulling America into recession. He cites a 14.4pc drop in housing starts last month; an expected loss of 600,000 real estate jobs in 2007; a sharp fall in home equity withdrawals - down from 6pc of GDP at the top of the boom; and a squeeze as $1,000bn of mortgages are adjusted upwards this year to higher interest rates."

If the US economy was to go into recession it would make the reverse credit situation even worse, causing negative equity and an increase in the number of home repossessions.

THe US real estate market has already experienced several redunancies. 22 Mortgage dealers have gone bankrupt in the last 2 months. This is increasing the cost of insuring against loan default.

Many feel that what is happening in the US housing market could soon spread to other housing markets such as the UK

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?

Buy To Let Mortgages: Is Now a good time ?

Buy to let mortgages have become increasingly popular in recent years due to 2 main factors.

1. Rising UK house prices. House prices have increased by over 100% in the past 12 years, leading to excellent capital gains for homeowners. In addition some areas of the country have benefitted even more.

2. Strong renting Market. Returns from renting have remained good, due to high demand for relatively low number of renting opportunties

3. Low Interest rates. Interest rates are much lower than in the past.

Many feel that the above factors may start to change. Firstly many economists believe that house prices may fall significantly in the near future, because they are overvalued. Therefore buy to let investors would be well advised to avoid buying at the moment. See house prices may fall 2007.

1. However there is no certainty house prices will fall. There are certain economic forces to explain the rising house prices. There is no evidence this has changed significantly. House prices may not fall

2. With a continued shortage of housing, the renting sector is likely to remain strong. However in some areas the income from renting is now failing to meet the requirements of being 130% of the value of the mortgage payments.

3. Interest rates have increased several times in the past 2 years, but economists suggest the future direction of interest rates could be downward by the end of the year. Inflation is still close to its target of CPI 2%. Also it is worth noting real interest rates are still very low by historical standards.


In the short term there may be some risk. But in the long term buy to let mortgages are probably a good investment affording the investor both a steady income stream and scope for equity gains.

See: Buy to Let Mortgages In UK

Getting Mortgage Low Income high Deposit

It is possible to get a mortgage on a low income. However it is becoming increasingly difficult to buy a house because house prices are rising faster than the rate of inflation. If your income is low. There are a number of possibilities to help you get a mortgage and get on the propery ladder.

1. A significant Deposit will help. If you have a deposit of over 15% of the house price, banks will be more willing to lend you a loan.

2. Self Certification Mortgage. This is a mortgage for those who have difficulty proving their own income. If you can save up a deposit (or borrow from parents) it sill definitely help in getting a self certification mortgage

3. Consider a Joint Mortgage. This is where you share the cost of buying a house with someone else. see Joint Mortgages

4. Higher Income Multiples Some banks are now willing to lend upto 5 times your salary. Therefore don't be discouraged if traditional banks turn you down.

5. Affordability is important. Many lending institutions look at your monthly income and outgoings. They look at whether you can afford a mortgage. Rather than just looking at traditional income multiples. See How much can I borrow

Mortgages for first time Buyers

See also: problems getting a mortgage at Shelter

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

Predicted House Prices in UK 2007

The Centre for Economics and Business Research (CEBR) predicted that in 2007 house prices could rise by £1,000 a month. Their argument to support this bullish view of the UK housing market is based on the strong underlying performance of the UK economy.

In particular they point to the large city bonuses being paid out in the financial sector. Workers in the Square Mile are expected to take home nearly £9 billion which includes record levels of bonuses. This will maintain strong demand for housing in London and the South east.

Other factors that point to rising house prices is the level of real interest rates. Interest rates are currently at 5.25% . This is the highest level for 6 years. However the level of real interest rates are not particularly high. This is because with CPI inflation at 3% and RPI at nearly 4%. The effective cost of interest rates is actually still quite low. Therefore this explains why the rise in interest rates has had little effect on dampening demand.

However the CEBR do expect house price inflation to tail off at the end of the year.

However their analysis could be criticised on several grounds. Firstly city bonuses are not reflective of the wider economy. Thus house prices away from London may not see the rising demand.

Secondly the £ is overvalued at nearly $2. Many economists think that at some point in time the £ will need to devalue to reflect its true purchasing power. If the £ does devalue it will increase inflationary pressures. Therefore this will require higher interest rates to compensate.

Thirdly there is increased evidence that the buy to let market is slowing down. The returns from renting a house are now less than the cost of a mortgage. With buyers concerned about a potential fall in prices, demand in this area is likely to be weak. There is also the possibility many buy to let landlords may take 2007 as an opportunity to sell and cash in on their capital gains.

There are mixed opinions about the prospect for house prices in 2007 but recently the council for mortgage lenders predicted a more modest increase of 7% in 2007 and 5% in 2008

See also : Future UK house Prices

See also House Price Crash f
or more predictions in 2007

More info: Times - house prices to soar

UK House Prices Rise faster than other countries

House Prices in the UK in 2006 rose faster than most other industrialised countries.

UK prices rose by about 10% last year. This was helped by low real interest rates and a strong economoy. In Europe house prices rose more slowly. e.g 7% rise in France, 4% in Italy and no growth in Germany.

However house prices in Eastern Europe grew faster, beginning to catch up with their western counterparts. Poland for example saw house prices rise by 30%

Rising house prices have been a global phenomena with house price inflation often far outstripping retail inflation and the performance of the housing market. However it is not all just rising prices. In the US house prices have started to fall in some states, revealing fears that house prices are overvalued and have been a victim of a "bubble"


The report's author Professor Michael Ball said that in the UK a strong economy and underlying economic forces prevented the market from falling he said.

"Fears of a considerable house price slowdown in what are considered as over-heated markets of the UK, Spain and Ireland, once again proved to be quite off the mark," he said."

See: Guide to UK housing Market

See bbc

Future of UK House Prices

Interesting article here on the Prospects of UK Housing Market. Evidence suggests that the UK housing market in particular can be subject to booms and busts. A crucial issue is whether inflation has reached its peak, or whether it will continue to rise.

One issue worth considering is that as the £ increases to nearly $2 this helps to reduced inflationary pressure. However most economists argue the £ is clearly overvalued. If the £ was devalued then interest rates would have to rise to take up the anti inflationary slack.

Also real interest rates are still quite Low. Therefore interest rates could continue to rise this year. If they do it could trigger buy to let investors to start selling and then we could witness a return to 1991 Style house prices falls... (maybe :) )

Sterling soars at FT

UK House Prices continue to Rise

House prices in the UK are continuing to rise above many people's expectations. The average house price in the UK is now over £137,000. The recent rise in interest rates should help to cool the housing market, however there is increasing evidence many homeowners are less influenced by interest rates than previously thought. Although they hurt first time buyers alot. Many homeowners have relatively low mortgage interest payments, they are also sitting on big capital gains encouraging them to help their children to get a big mortgage, perhaps with the help of a large deposit.

Is adding to your mortgage really reducing your debt?

An increasingly popular option for homeowners is to take advantage of rising house prices and consolidate their various debts into one place. If like many people in the UK you have a situation where your house value exceeds your mortgage you may be able to remortgage. This means you take on a bigger mortgage against the higher value of your house. This money can be used for various purposes, one of the main advantages is that you can reduce it to payoff other debts which may incur a higher rate of interest. Mortgage lending tend to be one of the lowest interest rates because the loan is secured against the value of your house. IF you are borrowing on credit cards you could be paying up to 20%. THerefore paying off this debt and borrowing through your mortgage should reduce your debt repayments, but not your overall debt burden.

However it is worth bearing in mind that your mortgage is likely to be over a 25-30 year period and therefore taking on more debt may actually increase your interest payments in the long term

Why House Prices in UK have increased

House prices in the UK have increased at a remarkable rate since the slump of 1994. With the average house price reaching £200,000 many question how long prices can keep rising. It is important to understand the economic rationale behind the UK's housing prices boom. Many of these arguments are relevant to other countries as well. Some of the main reasons include:

1. Shortage of supply.
2. Rising number of households.
3. Low long term interest rates
4. Increased flexibility of mortgages

for detailed article view: Why UK House Prices have increased

House Prices in 2007 - Rise or Fall?

There have been many reasons why economists have been predicting a gentle slowdown in UK housing prices. Groups such as Capital Economics have long argued that house prices are overvalued. Reasons for this include.

1. House prices have risen faster than earnings, making it more difficult for people to afford mortgages, especially first time buyers.

2. Increase in credit levels means any rise in interest rates is likely to have a significant effect on reducing demand for houses.

3. The value of buy to let is decreasing. This is because house prices are rising faster than rentable incomes. The returns form buy to let is becoming lower so there is less incentive for people to buy for this reason.

4. If house prices did start to slow down it could encourage speculators to sell causing a big fall in house prices.

However recent evidence counteracts these pessimistic forecasts. The housing market remains remarkably resilient with house prices rising by 10.5% in 2006. In addition The British Bankers' Association said demand for home loans was still growing. They are more than 9 per cent ahead of last year. This means demand is still strong. This suggests the moderate rise in interest rates in August had little effect on cooling the market. This is perhaps because consumers think that interest rates rises have peaked and are unlikely to rise further. This view on interest rates is shared by the Nationwide building society who have predicted that interest rates have peaked. They also predict house prices are likely to rise by 8% in the next year.House Prices 2006

The rises in house prices are likely to be fuelled by increasing number of foreign investors into the UK. Also city bonuses are rising faster than wage inflation sustaining a significant part of the house price rises. The continuing shortage of housing in key areas also shows no sign of being overcome. This shortage of supply means only a small increase in house prices are needed for significant increases in prices. However despite these factors (plus the forthcoming Olympics) there are fundamental issues which should reduce house price growth in the latter part of this year. These factors are the main issue of affordability for new first time buyers.First Time Buyers further out of reach
Many have been predicting house price falls for several years, arguing the market is severely overpriced. Yet despite these warnings house prices continue to rise and in the short term at least there seems to be no end in sight for the rise in house prices.

Determination of Regional House Prices in UK

Factors that determine regional house prices

1. Supply of housing. Supply of housing is important for determining regional variations in house prices. E.g. in parts of London it is difficult to build new houses therefore supply is inelastic. This is one reason why house prices are more expensive in London.
2. Demand for houses is varies in different part of the country. Areas with low unemployment and well paid jobs will have higher demand. This is quite significant because demand for housing tends to be income elastic (rise in income leads to bigger % increase in demand)
3. Schools. Parents are willing to pay a premium on house prices in order to buy in an area with close proximity to a good state school. This can work out cheaper than sending a child to a private school.

Changes in House prices.

1. Interest Rates. If interest rates reduce, then mortgage payments will be lower. This makes it more attractive to buy a house and benefit from cheaper borrowing costs.
2. Income. Rising income means people can spend more on buying a house. This is significant because demand tends to be income elastic.
3. Confidence / Speculation. If people expect house prices to rise then they will buy now and hope to make capital gains (increase in price of houses) People can buy to let. This means they try to make capital gains and rent to earn income.
4. Population. Rising population or rising number of households increases demand. E.g an increase in the divorce rate increases the number of households, more single people.
5. Taxes. Lower taxes on buying (stamp duty) would increase demand
6. Supply. If supply is inelastic it means any increase in demand causes a big % increase in price.