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.