Where Are House Prices Heading?

By MoneyhighStreet Staff. Published on June 11, 2007 This post currently has no comments.

House prices2

There are many confusing signals about house prices at the moment. Are prices going or are they falling and what are the long term prospects for the property market? We provide a few pointers in this article.

Although interest rates have increased by a full percentage point to 5.5% over the last year, latest figures from The Department for Communities and Local Government show that house price inflation actually accelerated in April - 11.3% annual growth compared to the 10.9% annual price increases seen in March.

Regional differences in house price inflation

Look more closely at the figures, however and you will see that there are significant regional differences in house price increases. According to the Land Registry, properties in London increased by 15.6% during the last twelve months, whereas the East Midlands only saw a 6.0% annual growth. A two tiered market is forming so how fast your house is increasing in price, and therefore how easy it is to sell, depends on where you live.

Large city bonuses and high levels of inward investment into London properties by wealthy foreigners are continuing to fuel higher house prices, however in other parts of the country the higher interest rates are starting to bite. People are becoming less inclined to borrow large sums and taking their time to find the right property and then to haggle with more determination. In the midlands, for example, a buyers market is starting to emerge, particularly with a high number of newly built flats being released into the market.

A property price crash is unlikely

Evidence across the whole country does point towards a cooling of the property market, but a price crash is highly unlikely.

Even though interest rates are rising, they are still far below the levels that triggered the last crash in the 80's. Todays population and property requirements are also very different from twenty years ago. There are more single parent families than ever before and the flood of European immigrants into this country create a strong demand for housing, which is not being met by demand. Those who cannot afford to buy have to rent, and this sustains demand for rental properties which props up the buy to let market.

So although the buy to let property investor is being squeezed by higher interest rates on the one hand, and by tougher tax laws on the other, they are still building their portfolios, driving price increases, albeit at a slower rate. Go to any property auction and see the room full of eager investors. They are still in the market.

A longer term view

The large number of European immigrants looking to settle in this country has huge long term implications for the property market. Not only do they need housing now, but as they become established and expand their families, the need for more houses intensifies. This is happening already. The UK birth rate is increasing, primarily because eastern Europeans tend to have larger families than is traditional in the UK. As their children grow into adults, they will need houses to start their own families. This will create a strong incremental demand for houses that cannot be met by current availability.

The government's initiative to build more houses, with a significant proportion being allocated to affordable housing, will not keep up with the growth in demand. There are only so many brown field sites available and there must surely be limits set on the destruction of green belt land that separates communities and towns. Increasing the density of houses generally results in a higher incidence of social problems.

Increasing the number of new build houses makes land more valuable causing land prices to soar. Materials and labour become more scarce and hence more expensive so that houses become more expensive to build. And therefore more expensive to buy.

Property is still a good investment

Even though there may be occasional peaks and troughs, it becomes obvious that changes in society and population dynamics coupled with finite land resources can only lead to long term house price inflation.

It is regrettable that for many families owning their own home may not become a reality in years to come, however they would not be burdened with the debts associated with high property prices. For those who can afford to own their own home, then the trails and tribulations of property ownership will very likely be rewarded with long term growth in their investments.

No matter what happens to house prices in the next few months, investing in residential property is still a good move, as long as you can afford the mortgage repayments.

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