Some commentators have been predicting house price falls in the UK for several months. But renewed house price growth in the UK this year inevitably raises the question of whether house prices have to fall.
There are various reasons to suggest that house prices are overvalued and likely to fall. The ratio of house prices to incomes has risen to an all time high, the effect of this is that house prices are becoming unaffordable; making it increasingly difficult for first time buyers. However, the banks get around this problem to some extent by being willing to offer bigger mortgages compared to salaries. The Abbey National recently said it would lend 5 times salary to certain borrowers.. Banks are also considering mortgages over a longer period. This increased generosity in lending has helped to keep the market buoyant without addressing the underlying problem of overvalued house prices.
Traditionally the view of the property market is that it is not just an asset but a place to live. Therefore unlike the stock market house prices won’t rise and fall due to speculation. However a lot of demand for UK housing is coming from buy- to-let speculators with many fixed on the idea that house prices are only likely to rise. If there was a fall in renting incomes this could be the first sign of house prices falling and investors would be likely to leave the market causing a significant drop in demand.
There are record levels of consumer borrowing in the UK. This is a combination of mortgage borrowing and personal debt like credit cards. The total level of debt is £1.168 trillion. Therefore even a modest rise in interest rates could have a very adverse effect on consumer confidence and spending. Therefore the housing market is particularly vulnerable to any rise in interest rates that may occur.
