What Next for the UK Housing Market?

You would need to have been living on Mars for the past ten years not to know about the rise and fall of the UK Housing Market. From the incredible price inflation of the early 2000s to the near collapse following the 2008 banking crisis, house prices regularly make for headline news. So what’s next?

Why is the ratio of the average house price to the average annual income still not back to pre-boom levels as some predicted should be the case? Will prices fall much further or are they on the increase?

House Price Trends Over the Past Decade

At the start of 2001, the average house price was £83,976. To put that into context, that would be the equivalent in today’s terms, i.e. taking account of inflation, of £114,928. The actual average house price today is £166,764. So in real terms, houses are on average almost 50% more expensive now than they were 10 years ago. Since the peak in the third quarter of 2007 however, when the average price in today’s terms was £209,045, prices have been falling steadily. This is welcome news for buyers of course but there is still a large balance to redress.

So why are house prices still so unrealistically high? With all of this economic gloom, with lenders not lending and would be buyers being unable or unwilling to borrow large sums of money and with no access to funds for a large deposit which is once again necessary, why is it that house prices are not closer now to pre-boom levels?

What are the Factors Keeping House Prices High?

One of the major factors which is controlling house price deflation and preventing a total collapse is the fact that sellers are not usually free to sell at any price they choose, because of the money they owe on the property. Prices may have fallen by, depending on which figures you believe, anything from 15% – 30% since the 2007 peak but debts have not. Take a first time buyer who purchased a property for £200,000 in late summer 2007. He most probably obtained a mortgage for 95% of the purchase price, so £190,000, of which he probably still owes at least £180,000. In order to sell he needs to pay off the mortgage, as well as the estate agents and solicitors and removal men, so he needs to achieve a sale price of, say, £185,000 just to break even.

The problem is; the value of his property has dropped by 20% since he purchased it so realistically he can only expect to achieve £160,000. In other words, he is negative equity and can’t sell except to someone willing and able to pay over the odds. Such a person would need to be a cash buyer, or at least have a significant deposit, as a mortgage lender will now only lend up to, say, 80% of the market value of £160,000, so £128,000. This example goes a long way to explaining both artificially high prices and sluggish sales.

Another factor is that sellers continue to be stubborn about what they will accept. Many current home owners will have bough their properties during the boom and will have expected to make a healthy profit on sale. Even those therefore who would be able to sell are reluctant to accept the reality and continue to over price their properties.

What Will Happen to the Housing Market in Future?

Firstly it is worth pointing out that although prices will always fluctuate in real terms, i.e. when inflation is taken into account, and actual sale prices may fall in the short and medium term, over the longer term, say the lifetime of an average mortgage, they will always rise unless there is a fundamental step change in the way we live our lives.

So in real terms, there are many differing opinions on what the future holds, varying from a gentle rise to a sharp fall and all points in-between. The truth is there are too many variables to know for sure, but looking at those variables can help us make a better guess.

Interest Rates

It is likely that interest rates will remain at the current very low levels into 2013 and possibly beyond. This can be a double edged sword. Whilst it makes borrowing more affordable and so helps to keep the market moving and stop prices falling as swiftly, it does have a couple of negative effects on the market. Firstly, it increases the “uncertainty factor”.

Would be buyers know that whatever there mortgage payments would be now, they are artificially low. We all know that it is inevitable that rates will increase significantly at some point but we do not know when, by how much or more importantly, how much the monthly mortgage payments will increase by. This can leave people, particularly first time buyers, reluctant to borrow as much as they might otherwise, if at all. Once interest stabilise borrowers will have more confidence in their ability to afford future payments.

The second negative effect of low interest rates is that it reduces the number of repossessions. Whilst this is a positive for society as a whole, an increase in repossessions would lead to an influx of affordable properties in to the market. This is because whilst home owners cannot sell for less that they owe on a property, a lender who takes possession can, and will, sell for the true market value. This would drive prices down and help to correct the anomaly created by the boom.

Employment Levels and the General Economy

Obviously, people will always be reluctant to make large financial commitments if they are worried about their future employment prospects. This is demonstrated by the situation in London and the South East, where 75% of the UK’s new jobs have been created since the banking crisis and house prices are still rising, versus the rest of the UK where prices are falling.

Despite the recession and despite the north/south divide, unemployment levels have not been as high as predicted. Should this change for the worse, the housing market will suffer from a further loss of buyer confidence, as well as able buyers.

The Equity Gap

As mentioned earlier, prices are kept artificially high, but sales are slowed, by the fact that many people are in or close to negative equity and are unable to sell. The good news is that since the banking crisis lenders are rarely lending more than 80% of a property’s value meaning that even accounting for further falls, negative equity will be much less common in future. As to those who did take 95% and higher loan to value mortgages before the crisis, they will over time either continue to pay their mortgages to the point where the debt reduces below the value, or be repossessed. Either way, their properties will once more become saleable assets at market value, thus increasing the number of sales and reducing sale prices.

Prediction for the Next Five Years

Taking all of the factors into account, many experts agree that prices will continue to fall until 2015, by perhaps 4.5% in 2011 and then by a further 1.5% per year. After that the picture becomes unclear but it seems likely that a combination of 3 factors; settling of interest rates, reduction in the equity gap for many home owners and a shortage of homes (only 106,000 new properties were built in the 2010/11 financial year against an increase of 240,000 in the number of households) will lead firstly to an increase in sales and, unless the housing shortage is addressed, perhaps even a new price boom.


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4 Responses to “What Next for the UK Housing Market?”

  1. Is anyone aware that 100% mortgages are making a return? I think its pretty beneficial to first time buyers as it allows them to get onto the property ladder.

  2. Paramount Magazine Says:

    You have a great blog with a lot of in depth information. It’s impressive.

  3. Great post and some good points well made! The next few years will certainly be an interesting time in the housing market, uncomfortable for many, profitable for some and a massive money pit for others.

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