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. Despite 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
- 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. The number of new houses built has been much lower than the government’s long term target of 250,000 houses a year.
- 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.
- 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. There is a cultural preference for owning your own house in the UK. Higher house prices have just encouraged people to seek alternative sources of finance. For example, young people increasingly borrow from their parents.
- 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.
- 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.
- Increased demand from abroad. The UK property market, especially in London has seen a growth in demand from overseas. This has kept UK property prices inflated.