The future of house prices

by Neil Faulkner on 21 May 2010  |  30 comments
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We review the top 5 arguments for and against short-term house price growth

By the simple measure I use for house prices – the long-term trend – prices are somewhat high now. But, if they remain at the same level, they'll be somewhat low in just two years, as I explained in Should I buy or carry on ranting?

For that reason, I don't think house prices are something homeowners need to worry about if they're taking a longer viewpoint.

But will there be some help for first-time buyers with another short-term drop in prices? I'll let you give your best guess on that. To help you, here are the leading arguments both for and against. Bear in mind these viewpoints are for average prices and that regional changes can be markedly different.

The bear case

1. Interest rates

Interest rates have a massive impact on house prices and I think most people would consider rapidly rising interest rates to be one of the most likely causes of a crash. Many of the bears (people who believe the market will fall in the short term) consider a crash inevitable, because interest rates can only go one way from here – up.

Whilst I agree rates can probably only go one way, I don't think that necessarily means they'll go all the way. They might stay low for such a long time that house prices, were they to stagnate, would have a soft landing. It's all about the long-term trend.

Just to stress, I'm not saying rates will stay low for a long time, I'm just pointing out that it's possible. High interest rates in the next few years are also possible.

2. Availability of credit

One of the main reasons commentators and readers are predicting more falls is that within a year the Bank of England is due to start removing support for banks. That means they'll have a shortage of cash to lend, and it seems unlikely that the banks will be ready to support themselves by then. Fewer borrowers will be able to get mortgages, so the demand for property will fall, and it would hardly be surprising if property prices followed.

However, a collapse in lending and house prices won't help the economy, so we must question whether the Bank would really remove support if it's still needed.

3. Supply and demand

The supply and demand argument contributes to both the bear and bull cases. (A bull is the opposite of a bear.) Here on the bear side, there's a report from RICs that sellers outweigh buyers and the gap is widening.

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Some say that landlords will also sell up, and fast, largely because of more taxes and an increased-regulatory burden.

I think we should remember that landlords are just one part of the supply and demand equation. What's more, I read a report only in April that at least as many landlords want to buy more property.

4. The economy

From unemployment – and the prospect of more to come with Government spending cuts – to our overwhelming debt, our situation is probably worse than fragile. Everything is interconnected, so any further deterioration could easily lead to another fall in house prices.

5. House prices compared to incomes

When looking at wages to house prices, we're still paying way more for properties than the historical average. The assumption is that house prices are therefore far too high.

More on that in the bull case.

The bull case

1. Supply and demand

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The bulls argue that there is a housing shortage and hence prices must rise. This is usually supported by quoting the Barker Report into housing and by forecasts that the population will rise from 60m to 80m over the next 40 years.

Personally, I think it's unwise to rely on this for short-term forecasts.

House prices fell recently despite those statistics and they could do so again. Those facts, assuming they're true, can be used more reliably to predict long-term patterns, not what's going to happen over 12-24 months.

2. House prices compared to incomes

Whilst the bears say prices are too high on this measure, the bulls say that dual-income households are more normal these days, which puts house prices on a fairer level.

3. Mortgage repayments

Another popular argument is that we can currently easily afford our monthly repayments, due to low interest rates.

The major weak point of this argument is that interest rates could easily rise. Human nature being what it is, many homeowners won't have been doing the sensible thing of saving for such a disaster.

4. Buyer confidence

It's been argued by some bulls that buyer confidence itself will lift prices and it's certainly true that us property crazy Brits and Northern Irish can get a little bit excited.

On the other hand, you don't hear many people these days who say they're not at all worried about the economy and our massive debt. I just don't get the sense of that much buyer confidence right now.

5. More mortgage lending

Finally, it's been claimed that mortgage lending has more than doubled since the bottom and it's believed that it'll continue to grow, supporting house prices.

However, you can see the sorts of conflicting data and reports that we're dealing with when you contrast that with the figures revealed in House prices are going to crash again. Remember that most reports will come from biased sources, which adds an extra layer of difficulty for making short-term forecasts.

More: Free online banking tool | Homeowners: Wave goodbye to HIPs and hello to £200 | You’re destroying the value of your home!

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