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.

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.