Entries Tagged 'house prices' ↓

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.

• Factors which determine house prices
• Why UK House prices are subject to Boom and Bust

The main house price surveys include:

Halifax Price Index. Halifax is one of the UK’s leading mortgage lenders. This gives it an insight into the UK Market.

Nationwide Price Index. The longest running house price index. See: Nationwide historical house price index

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.

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UK House Prices Between 1975 and 2007 Q4:

• 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

See historical data of UK house prices

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.

Rising demand for second houses has caused higher prices, especially in local property hotspots such as tourist areas like the Lake District.
This can cause economic problems. In particular, local first time buyers may be forced out of the market. Therefore, they will either have to rent, or they may be encouraged to leave the area. This can cause a shortage of labour and damage local economies e.g. shops can’t get people to work. In addition, it can change the nature of local areas because it is populated by ‘visitors’ as opposed to people who live there throughout the year.

On the other hand, people who buy second homes may bring wealth and spending power into the area. It depends how long they spend in their second house. If it is only 2 or 3 weeks a year then the area will not benefit. If they rent the house cheaply to local people in the intervening years it will be less damaging.

It also depends whether supply can increase to meet the demand for second houses. The problem in the UK is that it is often difficult to build new houses, especially in these tourist areas most affected by people buying second houses.

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1. There is a shortage of Mortgage Finance.

This is probably the biggest factor at the moment. Since the credit crisis of 2007, when many US subprime mortgages were defaulted on, there has been a shortage of available finance. Because banks lost money lending in America they are reluctant to lend to new homeowners. British Banks are asking for bigger deposits and are charging higher interest rates. Therefore, many people who would like to get a mortgage are unable to find a deal in the current climate. This means many first and second time buyers are having to rent rather than buy. This is causing a big fall in the number of people able to buy.

2. The ratio of house prices to incomes increased to an unaffordable level.

The long term average for house prices to income ratio is about 2.5 - 3. Currently it stands at 5. This means the average worker needs to take out a mortgage upto 6 or 7 times their salary. However, banks will no longer lend this amount of debt. Therefore, many, especially first time buyers simply can’t afford to buy.

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House prices are determined by a number of different factors. Firstly there are ‘economic fundamentals’ these are factors such as economic growth and the level of average incomes. However, in addition to the basic economic reasons, house prices are often quite volatile because other factors influence the level of house prices. In the UK and US we have seen the importance of speculation and investment in the housing market. This has caused house prices to rise more rapidly than incomes.

Also in recent years, the availability of mortgage finance has played an increasing role in influencing house prices. When mortgage companies are keen to lend a range of unconventional mortgages demand for housing will rise. But, in a credit crunch mortgage products are withdrawn leading to lower demand.

For more detailed analysis see: Factors that determine house prices 

Recently the drop in UK house prices accelerated. Surveyors reported the most pessimistic conditions since 1978. House prices falling at fastest rate since 1978 (link)

The house price falls are worst in areas such as Northern Ireland, the South West and East Anglia. Areas least affected include London, Yorkshire, and Scotland.

Lower prices are being driven by difficulties in the mortgage lending industry (see: can I still get a mortgage?), which have seen falls in mortgage lending by upto 40%.  The difficulties in the mortgage sector have occured because of the shortage of credit in the money markets. Many big financial institutions are experiencing grave difficulties in getting sufficient funding and the crisis may worsen before it gets better.

Will the Bank cut Interest rates?

If the Bank of England cut interest rates, then it may stem the house price falls because it would make the cost of borrowing cheaper. However, the persistence of cost push inflation makes cutting rates more difficult and so homeowners may not find mortgage rates any lower in 2008.

Factors which will prevent a crash of 1991

• Supply constraints still remain
• Interest rates are lower than in 1991. In 1991 interest rates were in double figures for several months making the cost of mortgage payments more than at present. The cost of mortgage payments is below the historical high

The last few months have increased the likelyhood of falling house prices in the UK.

These factors could contribute to housing price fall

1.  Increase in Mortgage Rates. Many banks are increasing their interbank lending rate; this is being passed on to consumers. Therefore, there is an increasing gap between the Bank of England’s base rate and the lenders Standard Variable Rate. This makes mortgages more expensive, despite base rate cuts.
2. Reduction in Number of mortgages available. The big mortgage lenders have been reducing the number of ’subprime’ and risky mortgage products. For example, 125% mortgages have been stopped and 100% mortgages are very rare. Mortgage lenders like the Nationwide have demanded a much bigger deposit from borrowers. With a marked fall in mortgage lending the demand for housing will continue to weaken.
3. People coming to an end of Fixed Rate Mortgage Deals. Many in the UK, were benefitting from being on low fixed rate mortgage deals. However, as these 2 or 3 year deals come to an end they will have difficulty switching to a new mortgage in the more difficult climate. Some will not be able to afford the new payments and so may end up with having to sell. Continue reading →

House prices in the UK now average at over £200,000. Yet, 15 years ago, they averaged less than £70,000. Some of the reasons for the large increase in house prices include:

Increase in Population. Boosted by immigration, the UK population now exceeds 60 million.

Increase in Households. There are more single people living alone now. This is due to social factors like higher divorce rates and more old people living alone.

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There is uncertainty about the future direction of house prices in the UK. Forecasts range from a collapse of 20%, to moderate increases of 2-3%. The mean prediction is probably for house prices to stagnate. However, within this house prices are likely to vary within geographical regions. For example, Scottish house prices have continued to outperform the rest of the UK.

Are House Prices Falling Now?

Amidst all the gloom and dire predictions it is worth bearing in mind, House Prices in the UK are still rising. After falling in the months of October and November, house prices in December rose leaving an annual house price inflation of 5.6%.

It is also worth remembering that the UK Housing Market has a recent history of outperforming expectations and predictions. This is because many people forget the shortage of supply compared to demand. Interestingly long term predictions of house prices suggest a 30-50% rise within the next 10 years.

However despite these underlying strengths, arguably there are a few factors which are different in 2008 Continue reading →