Where now for the housing market?

Posted on June 1st, 2011 | Categories - House Prices, Mortgages

Various recent reports into house prices, most of which are published on a monthly basis, seem to be painting a gloomy picture.

However these surveys only look backwards, so we thought we would take a look forward and see if we can shed some light on which way house prices may move over the coming months.

So why might house prices continue to fall?

There are a number of factors which could continue to push house prices lower.

Interest rates. The Bank of England Base Rate is at an all time low, and for those with a healthy deposit there are some excellent mortgage deals to be had at the moment.

Despite rising inflation the Bank of England are showing little appetite for an increase in interest rates in the short term. However the Governor of the Bank, Mervyn King has indicated that interest rates will have to move to more normal levels at some point in the future.

Any rise in mortgage interest rates could impact on affordability and therefore ultimately house prices as people decide not to move.

Lack of mortgage finance. Over recent years Banks and Building Societies have tightened their lending criteria. Many will say that this has been a good thing, especially the withdrawal of self certification mortgages.

However during this time lenders have significantly increased the amount of deposit needed to access a mortgage deal. This has hit first time buyers, who are the life blood of the housing market, particularly hard.

If lending criteria doesn’t loosen things will get no easier for those who want to enter the housing market. The market will continue to turn slowly which will act as a downward pressure on prices.

Job insecurity. People are unlikely to take on a larger mortgage if they are worried about their job. This again has a dampening effect on the housing market as people put off a house move, generally to a more expensive property, until they feel more secure about their employment prospects.

Falling prices themselves. Over time it is possible falling house prices becoming a ‘self fulfilling prophecy’. People see them falling and therefore wait to move knowing that in months to come the price will be even lower. This is why deflation in an economy is so dangerous.

Is there anything that may push house prices up again?

It can’t be all doom and gloom surely? Are there any factors which could push house prices up?

Lending criteria. A loosening of lending criteria, particularly for first time buyers, could help the mortgage market and therefore the housing market.

Over the past few weeks we have seen a handful of lenders launch mortgage products aimed at first time buyers requiring lower deposits, if this trend were to continue it may help kick start the lower end of the housing market as first time buyers find it easier to get finance.

Economic recovery. An improvement in the economic climate would hopefully have a knock on effect on job security. If unemployment begins to fall and people generally feel more comfortable about their job prospects they may become more inclined to commit to a house move.

Unfortunately at the current time economic data is mixed to say the least with redundancies, especially in the public sector still working their way through.

Rise in rental prices. Recent surveys have shown that rental prices are on the rise, if this were to continue it may push some people who are renting and waiting for house prices to fall yet further back into the housing market.

The Investment Sense view

The price of an asset is often driven by supply and demand and that would seem to be the problem with the UK housing market at the current time.

Supply is effected by people not putting their houses on the market for a whole variety of reasons. Demand is affected by people not being able or willing to buy at the current time.

It is our view that until the economy picks up and therefore job security rises we are unlikely to see any significant rise in house prices.

Even if this were to happen and lenders loosen their lending criteria just a little, a rise in interest rates could derail what is bound to be a tentative recovery.

In our view there is little evidence to suggest house prices will rise during 2011 or even 2012, we could of course be wrong and only time will tell whether this prediction is accurate.