Will House Prices Fall Even Further?
Crystal balls all over the country, and many other countries, are permanently being shined at the moment to seek an answer as to whether, and when, house prices will stabilise. As with all factors at the current time, the amount of uncertainty in the market place engendered by the banking crisis and recession means that few people are considering a house move.
House prices reflect supply and demand. With the population maturing and lifestyles changing, there is a much greater demand for housing and accommodation than ever before. People no longer live in nuclear families when they reach working age and are prepared to travel further and wider for work than their parents. This means that they need somewhere to live which pushes up demand. Although much of the mobile workforce looks for rental accommodation in the short term, the growth in demand has fuelled the growth in buy to let property ownership. This phenomena has also been encouraged by peoples' lack of confidence in the pensions market since the changes introduced in the late 1990s to tax relief rules.
So complex forces have been at work in the past 15 or so years to help increase property prices beyond what might normally, if such a state exists, have been expected. A swelling and mobile young adult base, increased divorce rates leading to the need for families to split and live separately and a perception that property can offer a better long term return than investing in the stocks and shares for a pension.
But now the bubble has burst – at least temporarily if not permanently.
The UK has one of the highest home ownership rates of any country in the world. Home ownership was encouraged in the late 1970s and 80s as social housing stock was sold to tenants as part of the wealth creation ideals of the then Conservative Government. Money raised through sale was not reinvested in social housing meaning that private enterprise has, in part, been left to fill the gap.
With the economy booming in the 90s, wealth enhancement through property ownership was seen as a certain bet. Banks and other lenders were happy to lend in excess of the property's value in the knowledge that with 10% price increases their negative equity would be covered within a couple of years. Buy to let purchasers, keen to cash in on the growth in prices, inadvertently added to the price increases as stock became much sought after. Interest and inflation rates dropped and property was the safe way to get good returns either through rental or capital growth in short time periods. Many would say that greed started to play a part with a return to gazumping practices.
With the emergence of the banking crisis caused, in part, by the lending of too much money on property that wasn't worth the value of the loan to people who couldn't afford to repay, many chickens have some home to roost. As the US economy slowed, property repossessions grew, housing prices fell and losses were incurred. Debt sold to global banks became tagged as 'toxic' and big write downs in value occurred helping to wipe out shareholder equity and reserves. Lending stopped except for the best customers with high deposits. House prices began to fall and confidence has ebbed away.
So what value is a house worth? Well, only what someone is prepared to pay for it. And here is the conundrum. If you believe that you can buy something cheaper next week than this, you will wait. Only when you believe that you are buying at a price that will not fall significantly further will you have the confidence to invest in that new house. Banks will start to lend again – at more modest levels – and house prices will stabilise. As confidence increases and banks start to lend, so demand will increase and prices may start to harden and grow.
Are we there yet? Well, in some parts of the country maybe we are close to the bottom of the market. Traditionally, London property prices lead and the rest of the country follows in a slow ripple across the land. Certain properties will always sell due to location, proximity or kudos, but it is when general demand returns that we will all feel the steady satisfaction that our home is, once again, our biggest asset.
Many predict that the fall in value could be up to 40% from the peak at the end of 2007. That is a long way to fall and many who have bought in the last 5 years will not see themselves out of negative equity for some time. Historically, the property market has been one of long term gains with short term corrections as values far outstrip affordability.