For a long time people have been predicting falls in UK house prices. Some people have been predicting the imminent collapse of the UK Housing Market for the past 6 years. However, a drop in house price may soon become a reality. What has changed in the past 12 months which now make house price falls more likely?

1. Sub Prime Mortgage Crisis.

Defaults on US mortgages don't directly affect UK house prices. But, many mortgage lenders have gone bankrupt, and therefore, financial institutions are much less willing to buy mortgage debt from banks like the Northern Rock. As a consequence the price of mortgages is likely to rise, especially for adverse credit mortgages - this is because they are considered more risky and therefore, require a higher premium. The increased cost of mortgages will discourage people to buy houses

2. Lower confidence.

As a result of the sub prime crisis, falling house prices in US and the northern rock crisis, many people are now more fearful about the future of house prices. In particular, this is discouraging buy to let investors. Some people may see 2008 as a year to sell and capitalise on their house price gains.

3. Increased interest Rates.

To combat rising inflationary pressure (which is actually still quite low) the Bank of England have increased interest rates 5 times in the past 13 months. Interest rates are now at 5.75%. Often there is a time lag for increased interest rates to have an effect. For example, people on fixed mortgages will be facing much higher deals when they remortgage over the next couple of months. Therefore, the impact of higher interest rates will continue to bear down on the affordability of mortgages and hence reduce demand for buying houses.

4. Ratio of House Prices to Incomes.

For many first time buyers the ratio of house prices to incomes means that it is difficult to save for a mortgage and difficult to save for a deposit. In the past first time buyers have often got around this difficulty by borrowing from parents and / or using unconventional mortgages like interest only or self certification mortgages. However, the sub prime crisis means mortgage lenders are now more reluctant to lend large income multiples. Therefore, the demand from first time buyers is likely to dry up.

• Are property prices likely to fall? - written in April 2007
• The effects of a fall in House Prices
• Why Roof fell in on US Housing Market
• Why House Prices set to Fall - more arguments for falling house prices.
  

Labels: Housing Market

The perceived quality of public funded schools varies tremendously. Increasingly parents are sending children to private schools. However, it is unsurprising that parents have been willing to spend a premium to move to an area which can guarantee entry into a "good school".

It is not surprising if you consider that the alternative to going to a good public sector school is spending £5,000 a year on private education.

For parents with this choice, living in an area of a very good school could be worth upto £5,000 * 7 = £35,000.


A university study examined links between house prices and state schools and found that

Research, carried out by the University of Warwick's Department of Economics, said parents were willing to pay up to £20,000 extra to buy into areas with the best schools. - link at BBC

Good schools raise House prices at BBC

If you live in the catchment area of a good school, but have no children of school age, it might be worth moving and cashing in on the school premium.

See also: What determines house prices

Labels: Housing Market

What supply and demand factors affect the price of houses and do schools with a decent reputation have any affect on the prices? Thanks! Nikhil

House prices are determined by a combination of supply and demand.

In the short term supply is fixed. Therefore, it is demand that has the most effect on short term fluctuations.

However, the long term rise in UK house prices is closely related to the fundamental shortage of supply.

The most important demand side factors are:

1. Real Interest Rates - Higher interest rates make the cost of mortgage payments more expensive therefore reduce demand for buying a house
2. Population - Growth in immigration has been a significant factor in increasing demand for houses, especially in the South East of England
3. Incomes - Rising income enables more people to spend on housing. However, house prices in the UK have been rising at a much faster rate than income, suggesting other factors are important
4. Confidence. - In the past 10 years people have had confidence in the future of the UK Housing market and so have continued to buy. However, in the US, people's confidence in the market has changed drastically. This has caused US house prices to fall.
5. Availability of Mortgages - To get on the property ladder, an increasing number of people have been getting unconventional mortgages. This makes it easier to borrow large amounts. Therefore, the high prices are sustained.

See Also:

• Why are House Prices in the UK so expensive?
• Factors affecting House Prices
• Why UK House Prices have increased since 1992
  

Labels: Housing Market

Some Economists and housing analysts argue house prices are significantly overvalued and are due to fall in the near future. Some paint a doomsday scenario of falling house prices leading to recession. Should we be concerned about a decline in the housing market?

Effect of Falling House Prices.

If house prices fall, it will lead to a decline in household wealth, and an increase in negative equity. The effect on consumer confidence is likely to be more significant than for rising house prices. People expect rising house prices, therefore, if house prices fell it would be a real shock, and could adversely affect consumer spending.

Many people have taken out expensive mortgage deal, in the hope that they will be able to remortgage after rising house prices. If house prices fall this will not be possible and they could face negative equity.

Therefore, falling house prices will reduce AD and lead to lower economic growth; It could cause a recession - a period of negative economic growth for 2 quarters.

However, if house prices do fall, it will reduce inflationary pressure in the economy. Therefore the Bank of England will be able to cut interest rates; this reduction in interest rates may maintain positive economic growth. However, it may be that falling house prices reduce confidence so much, that lower interest rates will be ineffective in stimulating demand.

It is worth remembering that in 1991, house prices fell 15% and this was a major factor in the recession of 1991-92.

A significant factor will be whether house prices fall gradually or fall sharply. If house prices stagnate there is unlikely to be a recession; however, if they fall dramatically in a short space of time, a recession is much more likely.


Related

• Effects of Falling US House Prices
• Boom and Bust in US housing Market
• Effects of Rising UK house Prices
  

Labels: Housing Market, UK housing Market

After several years of rapid growth in US House Prices. The US housing market has taken a sharp reverse in fortunes. The number of new houses being built has fallen considerably and in many states of the US house prices are now falling. There are concerns that this fall in house prices will leave the US consumers with negative equity and therefore could cause a fall in Consumer spending. In recent years it has been consumer spending that has been the main determinant of US economic growth. It has also played a key role in global economic growth. However although falling house prices will cause a significant reduction in US consumer spending the effects on the global economy are less than they may have been a decade or so ago. Emerging markets like India and China are seeing a developing middle class with an apetite for luxury goods. Thus if the US was to go into recession it need not cause the world to follow. It is also worth remembering the Japanese economy is starting to recover, the main driving force there is, at the moment, consumer spending.

Labels: Housing Market, US economy