This graph shows house prices in the UK since 1952, when the Nationwide building society started keeping records. House prices were a mere £1,891 in 1952. By 2007, they had climbed to just under £185,000.
If house prices had kept inline with inflation then a house should be worth £43,701.01 This reflects how mortgages have become more accommodating. Also, parents have used their wealth to help children get a deposit and bigger mortgage
Within this trend for higher higher house prices – two slumps stand out in the late 80s to early 90s and at the end of the 2000s. However, house prices have continued to rise faster than inflation.
House Price Growth in the UK in the past 15 years.
After experiencing a fall in house prices of 25%, UK house prices look to be stabilising, however, they are stabilising on thin levels of housing transactions.
Many homeowners and the government will be hoping for greater sustainability in the housing market rather than the boom and bust growth which has characterised house prices in recent decades.
If there remains an underlying shortage of housing in the UK, house price growth may continue to keep house price to earning ratios high.
A dramatic graph showing how much house prices in UK are falling.
Despite a radical cut in interest rates to 3%, house prices are likely to keep falling in 2009.
Why are House prices falling so much
Economic recession – rising unemployment increases number of home defaults. – People don’t want to buy with so much economic certainty
The snowball effect – No one wants to buy when house prices are dropping so much. It makes sense to wait and ride out the storm
The Credit Crunch – Banks are trying desperately to improve their balance sheets. They don’t want to lend mortages. Furthermore, with falling house prices, there is the danger of negative equity. Therefore, banks are wanting a big deposit.
UK house prices continue to fall. In the month of August house values fell by nearly £5,000 to £164,654.
The decline in house prices is linked to the shortage of credit in the mortgage markets, but, also reflects a fundamental long term misalignment of house value. House prices have risen faster than earnings as people have struggled to get on the property market.
House values depend upon.
Location. regional variations in house prices are significant even in a city
Supply compared to number of households. This is a problem for the UK, demographics have been increasing the number of households faster than the supply.
Economy. In a recession, demand for buying a house drops off as people look to rent. Unemployment also increases the number of repossessions leading to lower prices
Affordability. In long term, house values need to be affordable. A traditional lending requirement was 3 times income. though this has often been stretched.
Mortgage availability. The lack of mortgages in 2008 caused prices to fall.
There are various measures of tracking house prices in the UK. There are several different house price surveys that give different perspectives on the state of the housing Market. It can become a little confusing because almost every week, there will be 2 or 3 different surveys, giving a different figure for average house prices.
Royal Institution of Chartered Surveyors RICS. This is a survey of market confidence. They ask surveyors and estate agents about whether they expect prices to rise or fall in the future. Although this is less scientific it can give a useful guide to future trends.
Data from the Nationwide suggest that house prices are falling at their fastest rate since 1991. Average house prices have dropped from their peak in July 2007 and look set to fall further.
The main reasons behind the housing slump include;
Freezing up of mortgage sector. Banks saddled with bad detbs are unwilling to lend to first time buyers.
Fears over negative equity. Falling house prices mean banks are unwilling to lend mortgages without big deposit. Consumers are unwilling to buy with prospective of falling price.
Overvalued house prices. Prices rose faster than incomes stretching affordable.
How Much Will House Prices Fall?
Whilst the credit crunch lasts, mortgage availability will be limited. This will keep demand very low. Some predict credit crunch could last until 2011 and there is little the government can do about it.
Possibility of recession or severe slowdown means rising unemployment and depressed real wages. Combined with rising costs of living, this will depress demand.
However, as prices fall, buying will become relatively more attractive than renting. Combined with constrained long term supply, there is prospects of house prices regaining their upward trend in 1-2 years when the worst of the credit crisis is over.
Nominal House prices increased by 1,672% or £174,000
Real terms house prices increased by £119,085 or 164%
Note there is a much bigger change in nominal prices than real prices. It also means that with house prices falling now, the real effect is even greater. If house prices drop by 10% in nominal terms, it means in real terms for drop is closer to 13%.
The data is collected by the Nationwide one of the UK’s largest mortgage lenders. Nationwide
There are concerns that the UK could enter into recession. If this is the case, it would further weaken the UK economy. A recession would lead to higher unemployment and lower consumer confidence. Both these factors would have a negative impact on the Housing Market. Because housing costs are such a large % of income a fall in income would lead to lower demand and cause a big fall in house prices.
The only benefit of a recession, as far as the UK housing market is concerned, is that it could lead to lower interest rates. IN a recession, inflation usually falls and this means the MPC will be able to cut rates. However, this particular recession may not be straightforward as we currently have a slowdown and higher prices e.g. rising oil and food prices. If a recession is accompanied with a stubborn inflation rates, interest rates may not fall, further reducing the demand for the housing market.
