What’s in store for the housing market?

Over recent years there has been enormous house price growth within the UK, with homeowners seeing the value of their properties rocketing whilst non-homeowners have found it increasingly difficult to get onto the property ladder due to the high cost of housing.

However, after years of rocketing house price inflation 2008 looks set to be a year where house price inflation slows down or even grinds to a halt in the views of some industry professionals.

The latter part of 2007 saw house price inflation start to fall, and in some areas house prices and asking prices came down.

Many industry professionals have said that the situation spells good news for those looking to get onto the property ladder, as this situation may mean eased affordability. However, the news is not so good for homeowners who have been enjoying soaring prices and equity levels over recent years.

The governor of the Bank of England, Mervyn King, has recently said that homeowners need to prepare themselves for a fall in house prices in real terms over the next few years, adding that property prices are unlikely to rise much in the short term.

This is because, states Mr King, there is now likely to be a period where house price inflation remains flat or where house price growth falls below inflation.

The governor’s predictions came after the release of the quarterly inflation report from the Bank of England. He said at that time: ‘The central view in this forecast is, looking several years ahead, there’s no reason to expect house prices to be markedly above where they are now.

It’s conceivable there might be falls in house prices, but broadly speaking we’re looking at quite a long period now of stability in house prices, and that would enable there to be quite a marked adjustment in the ratio of different measures of affordability, such as house prices to earnings for example.’

He went on to state: ‘Four years of broadly flat house prices would mean a fall in 20% in the ratio of house prices to average earnings. So you can get quite big adjustments in the housing market without having to see large falls in house prices.’ He added:

‘None of us know what will happen to house prices.’

The Chancellor of the Exchequer, Alistair Darling, has also speculated on the future of the housing market within the UK, and he said that the UK is not as vulnerable to a house price crash as the United States. He added that some of reasons for this were a shortage of homes, low unemployment levels, and falling rates of interest.

He said that there was very little chance that the situation would get as bad as it did in the early 1990s. Darling stated: “Market conditions today are very different from those we saw in the early 1990s. Interest rates remain at comparatively low levels - as do mortgage rates. And unemployment is currently at 30-year lows.”

He also said: “What’s more, there are important differences between the housing market in the US and the housing market here. While many US mortgages were sold at hugely discounted rates, leaving people unable to meet repayments when rates increased, lenders in the UK have been more responsible in taking account of an individual’s ability to pay. And demand for housing outstrips supply.”

Although house prices at present are around 4% higher than they were at the same time last year, experts have made a number of prediction with regards to the level of the expected falls, which has been estimated at between 5 and 10% by various experts.

There has also been a great deal of speculation about interest rates, with some industry officials convinced that they will fall considerably over the course of this year, and that they could even fall as low as 4%.

However, in a recent statement the governor of the Bank of England said that it was unlikely that interest rates would fall as quickly or as much as some had predicted.

One economist recently stated: ‘The basic point is the bank is saying that interest rates are not going to fall as far and as fast as markets currently seem to think. The indication is that it’s going to proceed with bringing interest rates down at a fairly steady pace. That said, I think its forecasts for economic growth are overly optimistic and therefore I think ultimately it will have to bring interest rates down more aggresively than it currently expects. We still think that rates will eventually fall to 4 but that partly reflects the fact that they’re going to bring them down at a slow pace.’