The Mystery of British House Prices (2010)

To many people’s surprise, UK house prices have risen quite strongly in the past 12 months.

If we look at the experience of Japan, United States, Ireland or Spain, it seems the experience of Britain is unusual. Countries like Japan and the US had a boom and bust in  house prices, similar to the UK. However, the fall in house prices has been more pronounced and longer lasting in other countries.

Given the weak state of the UK economy and financial sector, it is perhaps surprising house prices have recovered so strongly.

Several Factors would normally be lowering house prices

  • House price to earnings ratios are still above long term averages.
  • Unemployment is rising
  • The economy is very slowly recovering from its deepest recession since the 1930s
  • Banks are still reluctant to lend mortgages because of lack of finance.

Yet, despite these factors, figures from Rightmove suggested the annual rate of house price inflation was 6.1%. Prices rose 3.2% in the month to February alone. Rightmove measure asking prices, though other house price surveys such as Nationwide paint a similar picture.

There is every possibility that house prices could stop rising and start falling again – especially if the recession lengthens and there is significant job cuts in the public sector.

Yet, at the moment, the combination of – low interest rates and a relative shortage in supply is pushing house prices higher.

It is this shortage in supply that I feel is the main the reason for fact British house prices have stopped falling. In Spain, US and other countries, the boom in house prices, led to a boom in house building. Therefore, they have depressed demand and excess supply. – which hopefully all students would know is a recipe for falling prices.

In the UK, demand is still relatively weak, but, the excess supply is not there – a legacy of the UK’s strict planning regulations.

In the long term, what it suggests is UK house prices will remain expensive – meaning people who want to buy a house will have great difficulty saving for a deposit.

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