Investment Markets » Construction and Property
Can House Prices Really Go On Rising?
If interest rates rise, is the housing market bound to tumble? Or will the imbalance of supply and demand keep prices up?
Nobody wants to be the bearer of bad news – that may be why it's almost impossible to find a housing market expert who predicts a crash or even a slowdown this year after a 10% rise in 2006. But don't be misled: there's increasing nervousness out there, focussed on the likelihood of further interest rate rises and the fact that "affordability" – house prices relative to average incomes – is at an all-time low.
In a Financial Times poll, for example, 11 out of 41 economists described the housing market as suffering from irrational exuberance: that's not quite the same as predicting doom, but their concern is, at the very least, food for thought.
Then there's David Miles, chief UK economist at Morgan Stanley, who warned in November that only half the recent growth in house prices could be explained by genuine issues of supply and demand; the rest was due to a "speculative bubble that could be about to burst".
But those who do predict a crash are wrong – because they're making two big mistakes. First, they use the wrong measure of affordability: if you look at the ratio of average prices or mortgages to income, houses have indeed become less and less affordable since the mid-Nineties. But if you measure mortgage interest payments against income, houses remain perfectly affordable, especially for first-time buyers. Secondly, doomsters have ignored the laws of supply and demand.
Family breakdown, immigration and the desire of young people to leave home mean that the number of British households is officially predicted to grow by 209,000 a year. But in the past year we built only 164,000 new houses, and until house building catches up with household formation, prices are bound to rise. This may sound blindingly obvious, but apparently it isn't to a large number of otherwise quite distinguished economists.
So how should we interpret the latest Halifax survey showing an unexpected 1% drop in house prices in December, combined with a prediction by Lombard Street Research that interest rates could rise from 5% to 5.75% this year?
Some people have lost sight of the painful reality that house prices can actually fall. December's outcome is a useful reminder: with interest rates on the up, the risk is now definitely moving towards the downside.
Vericool Related Articles
- Fannie and Freddie
- Rescuing The Housing Market
- Should We Mourn The Cheesegrater?
- Tackling The Mortgage Famine
- Has The Housing Crash Begun?
- Are House Prices Headed For A Crash?
All articles are free to reproduce on your website as long as you provide a link to the source of the article on the Vericool Finance website.