Are House Prices Set to Drop?

UK House prices have experienced a roller coaster in recent years. The economy is fundamentally weak, but house prices have often surprised analysts and proved remarkably resilient. The UK has a combination of rising number of households and limited supply which can push house prices higher, even during difficult economic times.

Arguments that house prices will fall substantially:

  • House Prices increased faster than earnings. Despite the fall in house prices we saw after the credit crunch, the ratio of house price to incomes is still well above levels seen in the mid 1990s after the 1990s crash (House price to earnings ratios fell to 2.1 in 1995)
  • First Time buyers increasingly priced out of the market,
  • Mortgage lending is becoming stricter since credit crisis. Banks have largely jettisoned previous unconventional mortgages; now buyers need to save a decent deposit and can only borrow a limited 3 times income.
  • Fall in confidence in housing market.
  • Although interest rates are currently very low, when the economy recovers and interest rates rise, we are likely to see a sharp rise in the cost of mortgage payments, meaning many more households will start to struggle to meet payments leading to fall in demand.

Why House Prices May not fall

Limited Supply.  There has been a disappointing number of houses built in the UK. Demand continues to outstrip supply. This limited supply has partly been due to weak economic factors. But, also it reflects the fundamental problems of getting planning permission.

Rising Number of Households The UK population is set to rise to 70 million by  2030. The rising population leads to rising demand for housing, but it is not clear whether the supply will be there to meet it. The number of households will also be boosted by demographic factors which lead to smaller household sizes.

Cheap Mortgages. For those with a variable mortgage, low interest rates are making mortgage payments more affordable, increasing demand for houses

 

I will shortly be writing about the economic and financial implications of falling house prices. But, I would be interested in your experience. Do you think UK house prices will fall substantially, or will they soon recover?