With the average price of a house likely to have reached £200,000 and residential property making up 53% of household net wealth, whether the housing market is going to crash or otherwise makes regular pub conversation.
It is quite easy at a first level to worry that the market could crash in the next few years, argues a report from the centre for economics and business research. With house prices rising by 10.2% on average every year since 1996 and average gross earnings rising 4.2% every year, the ratio of house prices to incomes has increased from 4.4 to 7.9 in the same period. It is an easy and lazy argument to make that the house price inflation seen in recent years is driven by speculation — and we all know that speculative bubbles must all eventually burst.
However, says the cebr, there is one fundamental problem with the housing market in the United Kingdom that will prevent a housing market bust: the demand for houses by far exceeds the supply of houses. This fundamental mismatch, which developed after the housing market fully recovered in 1996 from the 1989 crash, is caused by a number of factors — which are likely to persist in the foreseeable future.
First, the United Kingdom does not have a large enough stock of houses. In 2005, 193,000 new houses were built — the highest in over fifteen years. In her housing review in 2003, Kate Barker said that to bring real house price growth down by a significant amount, the United Kingdom needs to build 245,000 houses every year. Government planning restrictions and schemes such as key worker housing prevent the construction sector from fully responding to the house market’s price signal.
Second, population growth — boosted because more of the world’s people want to live in the United Kingdom — and an ever smaller household size means that there are more people who need to live in houses than ever before and, also, that more houses are needed per person.
Third, when thinking about buying a house, potential house buyers do not compare their income to the price of a house. Rather, they compare their income to their annual mortgage payments. With interest rates at or below 5.0% in recent years, mortgages remain affordable when compared with the early 1990s. Although mortgage payments as a share of household income have risen from 15.0% in 2001 to 19.6% in 2005, they remain well below the 34% recorded during the 1989 crash.
Fourth, the new large and rich countries of the world — oil producing countries and the Asian dragons — remain happy to park their new found wealth in the world’s main financial centres: New York and London. A significant amount of money that flows in to the City of London, by one mode or another, ends up in the property market.
Fifth, because of the nature of economic growth it is natural that certain areas of the country will see more economic activity as the economy expands. Because of lack of transport infrastructure, these growth areas are unable to geographically increase their labour catchment areas, meaning that more people need to live in certain locations — exacerbating the mismatch of supply and demand.
Looking forward, as long as supply continues to fail to react to the burgeoning demand for housing, it is very unlikely that house prices will crash. In our latest house price forecast, we see inflation slow from an average 8.2% this year to 4.6% next year and 1.3% in 2008, before picking up again.
Higher interest rates, tight household bills and the world economic slowdown will cut back house price inflation, making talk of a possible crash more of a pub topic. But as long as the fundamentals remain unchanged, a housing bust is very much off the cards.
Source - Centre for Economics and Business Research
This is a great post :)
Although I don't like to tempt fate, I definately agree. But on the other hand, this just suggests that prices will keep increasing (maybe not at the same pace it has been), meaning it will be increasingly more difficult to buy for the average investor, let alone buyer.
I'm only a small time investor; and I generally go for low risk deals. I only have two properties at the moment- i keep having to stop and start until I gain investment capital :(
I've added you to my blogroll, because I like what i've read so far.
Kind regards.
Posted by: Property Amateur | March 31, 2007 at 16:44