Will house prices really rise by 40 percent in the next 5 years?

By MoneyhighStreet Staff. Published on August 6, 2007 This post currently has no comments.

Monopoly house

As we point out in our news section today, the National Housing Federation (NHF) is suggesting that house prices could increase by as much as 40 per cent in the five years.

The NHF are also suggesting that the average price for a house in England and Wales will be £300,000, up from an average of £200,000 now.

Although this sounds promising for all the house owners and property investors who would see increases in their capital, we wonder if house price inflation will continue at the level predicted by the NHF.

The end of an era of low interest rates?

Over recent years, we have seen some of the lowest interest rates since the second world war and it is not just the UK which has enjoyed such beneficial rates - Japan still has 0pc interest rates and the USA had rates at a 45 year low in 2003 - just one percent.

Times are changing now though, and the world is moving into an era of higher interest rates. The rises over the last year in the UK have been mirrored by large interest rate increases in the USA.

This is because many countries are now fighting inflation fuelled by massive volumes of cheap imports from China and beneficial interest rates that rewarded spending and penalised saving.

As interest rates rise, people tend to borrow less which affects house prices. House price inflation is already slowing this year. According to the Halifax, house prices have only risen by 1.3pc in the last three months.

It is unlikely that we will see such low interest rates again for a considerable time so we'll just have to get used to higher costs of borrowing, which must exert a brake on the housing market, even if it doesn't go into decline.

Will immigrants really buy all those new houses?

As we have reported, Gordon Brown wants to build 3 million new homes by 2020, and the NHF supports his strategy, particularly with regards to the building of a large percentage of social housing.

It is plain to see that the immigration of large numbers Eastern Europeans is changing our society - the numbers of people attending Catholic churches is increasing, and supermarkets are having to source an increasing number of ethnic food products from Poland and former eastern bloc countries.

But will they really require 250,000 new houses every year for the next twelve years? In the five years to the Olympics in 2012, Gordon Brown wants to build 1.25 million houses.

According to Government figures, there is a demand for 210,000 new houses per year. This means that there will be 200,000 houses built under Gordon Browns plans than are required.

We all now what happens when supply exceeds demand - prices go down.

Consider the NHF figures with caution

As we've discussed, there are two major influences on future house prices that are apparent - higher interest rates for a number of years, and Government plans to significantly increase the number of houses being built.

Yes, it is true that house prices have outstripped inflation over the last decades and property remains a good investment, however predicting such large house price increases when there are such large changes afoot, is risky.

Make your own mind up, of course, but we remain wary. It seems like the start of a new economic era and it feels a bit less predictable. It is unlikely, though not definite of course, that house prices will increase as much over the next five years as they did during recent years.

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