Why are UK House Prices Falling?

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.

3. Expectations of Falling House prices.

People are now pessimistic about the prospect of the UK Housing Market. They expect falling prices and so buy to let investors have less incentive to enter the market; they have a good incentive to sell. These negative perceptions are becoming self fulfilling.

4. Slowdown in the economy.

The UK economy is still growing, but, the growth rate has fallen and unemployment is likely to increase. Therefore, people are more cautious about buying. People’s living standards are also being squeezed by rising oil and food prices; leaving less discretionary income for spending on the housing market.