2005-02-04

Stats & Money: Latest House Price Predictions

House prices are unlikely to 'crash' in the next three years, according to 'The Treasury', despite predictions of a slump as the property market threatens to 'boil over'. Prices will fall by nearly 1 per cent over 2005 -- but then will rise again -- at the same rate as earnings, according to estimates. The official forecast (which was omitted from 'The Budget Report'), suggests that 'The Treasury' does not believe the housing market is seriously overvalued.
The information had been available on the department's website but was drawn to public attention in response to a request under the new 'Freedom of Information Act'.
It comes after an 'economic think-tank' earlier this week forecast a 15 per cent plummet in property values, and follows a recent 'cooling' of house price growth.
Britain's largest lender -- 'The Halifax' -- in their 'House Price Index' published yesterday 2005-02-03, said prices rose by 0.8 per cent last month (2005-01) and were at their slowest annual rate of increase for three years. Reported values had risen by only 1.4 per cent over the past six months, while annual house price inflation was at its lowest rate since 2001-12.
'The Treasury's' belief that prices are unlikely to fall relative to earnings over the medium term implies that the surge in property values (that began in the late 1990s) is permanent. However, most economists disagree with 'The Treasury', and prefer to believe that house prices are over-valued (compared with earnings) and so will have to drop -- in order to fall back 'into line' with buyers' salaries (although there is disagreement among them on how quickly this re-adjustment will happen). Scotland's property market is more stable than the rest of the UK, with the gap between earnings and house prices less marked than in 'overheated' areas such as south-east England.
'There isn't really a big affordability gap in Scotland as there might be elsewhere', said Mr.Tim Crawford, group economist at 'The Bank of Scotland'. 'In many ways, Scotland has the best position -- because overall prices remain lower in relation to earnings than elsewhere: houses are generally more affordable. 'We share "The Treasury" view that there is unlikely to be a sharp drop in prices soon'.
Ms.Vicky Redwood, co-author of 'The Capital Economics Report' published 2005-02-01, which predicted a 15 per cent drop in prices over the next three years, said:
'This is all about a difference of opinion about what will happen next. There is a consensus that, in some areas, house prices are too high in relation to earnings. 'We believe prices will drop but it is in "The Treasury's" favour to be more optimistic -- it will gain more in "stamp duty" if prices are higher'.
Freedom of Information Guy and Madonna Ritchie paid 5_million_GBP for their home in London, the England football coach, Mr.Sven-Goran Eriksson, shelled out 2.5_million_GBP, while actress Ms.Patsy Kensit's townhouse was a relatively affordable 1.3_million_GBP -- all according to a new website. The service, provided by 'The Land Registry of England & Wales', aims to help homeseekers by revealing how much other buyers paid. It mirrors a similar service from 'The Registers of Scotland', which contains data on prices in Scotland. 'House price crash is unlikely says Treasury', Alastair Jamieson, The Scotsman, 2005-02-04

2 Comments:

Anonymous Anonymous said...

Who knows? I watch a lot of those property TV shows, and the so-called experts in thse rarely if ever seem to get it right.
Whatever the market does, there will be some expert to be able to claim that they got it right, who knows, this time it may be the government.
The fact is the cost of a house relative to salaries is secondary to the deals made possible because of the demand.
If the demand for housing is great (even if salaries are down and house prices are up), then lenders will simply adjust their rules, lengthen the term of the loan or otherwise take steps to make mortgages more affordable.
That's open market forces. If the demand is not there, then the market will regulate itself back. What matters in the long run is the push-pull supply-demand relationship that is what underpins the housing sector, not interest rates, and not treasury predictors, they only affect the short term.

2/04/2005 01:23:00 pm  
Blogger Dave said...

Hi
I'm not so sure that the last comment is quite as true as one might hope. Yes, it makes sense, but there's always a what-if.

In this case, it's what if the lenders do not (or cannot) lend or change their lending criteria?

I mean, would YOU lend (on very flexible or easy terms) to a person already upto the hilt in debt -- or an insolvent/bankrupt person?

There are presently calls for Credit Card companies to explain terms better to their customers -- and also for all lenders to tighten up and make lending more restrictive.

I have posted an article on this blog today that shows England & Wales as having record bankruptcies and insolvencies... the highest levels ever recorded for that country.

If the Bank of England ups the interest rates yet again (once the election is over), then there will be a massive effect on the economy -- personal debt will rise to the extent that it will squeeze out further bankruptcies and companies will be forced to close, leading to rising unemployment -- which in turn will lead to foreclosures and debt recovery measures, a tightening up of lending, and a slowing down of the mortgage sector, house values, and so on.

In a free market situation, yes, there's a supply-demand dynamic, but where is this free market anyway? Isn't it hypothetical and theoretical?

However, you are right -- who knows what will happen? Maybe the government is 'optimistic', maybe they want to appear that way before an election, maybe this maybe that.

In light of these reports and results, however, I would suggest that you stay put for the time being, don't move house for a few years, settle down, try to clear loans and credit card balances, pull things in a bit ahead of time to get some slack for the months ahead when you might need it.

2/04/2005 04:09:00 pm  

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