UK house prices: Pessimistic UK housing economists must be getting a bit miffed. They keep saying the UK housing recovery is unsustainable, but average house prices stubbornly keep rising – for five straight months, according to the Nationwide index. But the bears shouldn’t lose heart.
To see why, look at the UK housing market before the financial crisis. Then, around 8 per cent of the housing stock changed hands each year – leading to 90,000 new mortgages. By February this year, both these numbers had fallen by around two-thirds, and house prices were down 21 per cent. Since then, transaction volumes and mortgage approvals have recovered to half their previous levels.
That’s not enough to support a real recovery. To start, the supply of new, first-time buyers is limited, now that a deposit of 25 per cent of the price is required to get a mortgage at punitive rates, 7 per cent or higher. When the supply of cash-rich young people is exhausted, sellers will outnumber buyers.
Also, borrowers whose mortgages have interest rates tied to Bank of England’s overnight rate, currently at 0.5 per cent, can keep holding on. Many of this currently happy group are buy-to-let landlords who bought at the top of the market with little to no equity. When rates rise, a murderous wave of forced selling could be expected.
So, prices can keep rising, but only if interest rates stay low and banks soften their terms for new buyers. But the reverse is more likely. If the UK economy keeps recovering – and the International Monetary Fund has just said it will do so more sharply than previously expected in 2010 – then rates will eventually rise, probably well before banks return to pre-crunch levels of lending.
That leaves house prices in an odd place. If the economy stays weak, rising unemployment and lack of mortgage supply will keep a lid on a recovery. If the economy motors, rising rates could re-open the Pandora’s Box of forced selling. Either way, the bearish case is still strong.
