Property Prices- Is This a Mini Bubble Ready to Burst?
November 2nd, 2009 News, ObservationsA recent rally in house prices have lead people to think the housing market is on its way to a sustained recovery and most of the main surveys reflect this. Nationwide report four months consecutive growth with a staggering 1.6% rise in August alone. Halifax and Royal institute of chartered surveyors (RICS) both report similar findings.
According to data from the Council of Mortgage Lenders new purchase mortgage lending is also on the rise with 56000 mortgage being approved in July, 24% up from June and 19% up from July 2008.
Now lets look at the facts. Many economists believe these rises are the result of basic economics where demand outstrips supply with many “reluctant” landlords preferring to let their property rather than try to sell at a reduced price? As more and more of these landlords decide to sell (which is already starting to happen) the supply of property will more than likely increase above the demand and therefore effecting prices.
Realistically the only way property prices can sustain a long term recovery is when lenders decide to ease their lending criteria to make it possible for the average person on the street to secure a reasonable deal instead of having to provide unattainable deposits, pay large arrangement fees and endure rates well in excess of the current Bank of England base rate. At the moment finance is extremely hard to obtain so once the current crop of cash rich landlords buying up cheap properties reduces the demand for property will reduce.
Many economists and commentators within the industry believe that lending will not improve in the near future as banks are taking healthy profits to make up for large losses. There are a number of lenders waiting in the wings (including bank of China) that see the UK mortgage market as very profitable but not enough to make a marked difference to the terms on offer.Add in an inevitable increases in interest rates (which is likely to happen at some point in the next 2/3 years) and rising unemployment, especially in the public sector as they cut spending, and I believe the writing is on the wall for a sustained recovery at this point.
What does this mean for the future? I do not have a crystal ball but reading several articles from commentators within the property industry the general conclusion is that property price rises are expected to slow down at some point next year as supply of property outstrips the available demand (ie those people wanting to buy who can finance the property) and as unemployment rises prices could start to fall. Recovery could take 4/5 years before prices reach the heady heights of 2007!
So if you are wanting to buy property or move upmarket I believe there is no great rush. Also bear in mind that any finance taken out at present will offer poor value so make sure you negotiate any deal to your advantage as much as possible. As supply rises so will choice and thus so will your ability to negotiate better deals.
In the longer term, basic fundamentals of supply and demand should prevail pushing up prices as current housing stock is reported to be short by 1 Million houses by the backend of 2010 and with current builders under producing by an estimated 150,000 homes per year this will only get worse (based on a report by the Town and Country Planning Association). As demand rises when credit eases prices should rise due to the lack of supply.
