Many people believe that the UK housing market is greatly overpriced whilst others say that house prices will continue to grow. Although both sets of people have differing consensus, they both agree on one thing, house prices are astronomically high at the moment.
In this article will look at the arguments both sets of economists put forward as to why house prices will continue to increase or decrease.
Arguments for increasing house prices
- Increasing Population – The population in the UK is ever increasing. More and more people are being born each year and the influx of foreign individuals does not look to end soon. With population increasing as it is at the moment, and houses not being fast enough, you can only see house prices going one way – up.
- Higher Education – Have you noticed that property prices only seem to go up in certain areas in a city. These areas are normally the clusters where the middle class (and wealthy) live. With more people going to university and more graduates and managerial jobs, more people will ‘fight’ for houses in these ‘safe neighborhoods’ thus driving the price up.
- Interest Rates remain low – Many analysts now believe that interest rate will stay at their current low levels thorough 2015. Even those economists that think it will increase, say it will only increase in the third or fourth quarter and at a rate of 0.5% a year. This will not be enough to curb the current growth in house prices
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Arguments for Decreasing House Prices
- House price to wage ratio – House prices are currently more than 5 times earnings since the crises. The ratio of House Prices to Wages has an artificial barrier of 5 and the 2 other times the ratio has gone above this level, the housing market has crashed. If this ratio is to go by,
house prices should fall by about 20% in real terms in the next two years.
The News is even worse for London. The London property bubble is now comparable to the magnitude of the 1990s Tokyo real estate bubble. Average house prices in London have broken and soared above the £400,000 barrier or 10 times average national income.
- Interest Rate increase – If interest rates were to increase higher then the rate mentioned above, it could signal trouble. But this situation seems highly unlikely at the moment with inflation creeping towards new lows. Interest Rates will only start having a dramatic effect on house prices once the base rate touches 3% – 4%.
- More regulated mortgage environment – This year will see the mortgage environment being more highly regulated, particularly in the face of likely interest rate rises. There will be tighter checking of prospective mortgage borrowers by lenders and this means that the number of mortgage approvals will reduce. With less people having access to mortgages, house sales will reduce and average prices will drop.
As you can see from the above, there are a numerous factors that will influence the housing market this coming year. I for one think that property prices in London will reduce whilst those in the rest of the UK will rise minimally or flatline. Only time will tell where house prices will go but I believe the next few years will reverse a trend as it will be a buyers market.