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.
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.
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.
The UK stamp duty thresholds mean that buying a slightly more expensive house can lead to a big jump in the amount of stamp duty that you have to pay.
For example, if you buy a house for £249,000 the stamp duty is £2,490
However, if you buy a house for £250,000 the stamp duty rises to £7,500 or 3%
Clearly, if you are considering buying a house just above the threshold level, it makes sense to try and barter the price down and compensate the seller through other means.
For example, you might be able to get away with purchasing the furniture as a separate deal. Alternatively you could pay them just under the threshold and give them gifts in kind such as white goods to make up the loss.
