What Causes House Prices to Fall?

Some factors that can cause House prices to Fall

Rising Interest Rates

Increased interest rates increase the cost of mortgage interest payments making it less attractive to buy. Some homeowners may not be able to afford rising mortgage payments so they have to sell.

Sometimes there is a time delay between increasing interest rates and affecting house prices.

For example, in the UK, interest rates rose 5 times since August 2007. However it is only now in 2008 that people are having to remortgage fixed rate deals. Therefore, people on a fixed rate mortgage deal are seeing the cost of mortgages increase significantly.

Even a small change in UK interest rates can have a big effect on prices. This is because mortgage payments are a high % of people’s income

Lower economic Growth.

A slowdown in UK economic growth would reduce demand for buying a house. If people fear they could be made unemployed, this will act as a disincentive to buying.

Confidence / Speculation

Most people buy a house to live, but, some buy to let investors are looking for medium term capital gains. Therefore, if they think the market has peaked, they will look to sell their houses and cash in on their capital gains.

Prices Overvalued.

Related to the last idea is the basic economic concept of supply and demand. If house prices are overvalued then the supply and demand of houses will cause prices to return to an equilibrium level.

Increased Supply.

Many people bought property in Bulgaria hoping that property in Eastern Europe offered a good opportunity for capital gains. However, the increase in supply has caused prices to fall in some instances.

Difficulty in Getting Mortgages

The American sub prime mortgage crisis has precipitated a fall in the availability of credit. Therefore, banks are more cautious about lending mortgages, especially in the sub prime sector. This means the number of home buyers will decrease.