UK House Prices Set To Fall?

on Jul 24, 2012
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The 2012 London Olympics are due to start at the end of this week – weather permitting – after seven years in the making. And during that time home-owners in the east London suburbs surrounding the Olympic stadium and village have, according to figures released by Lloyds TSB, seen their property values jump by 33 percent, comfortably ahead of the average of 24 percent across England and Wales. Of the 14 suburbs covered, Homerton in the borough of Hackney recorded the greatest rise – average values there are a whopping 59 percent up on 2005.

Of course, the ‘Olympic effect’ is not just about the games themselves, or even at all, rather it’s a reflection of the huge taxpayer investment in amenities and infrastructure in what was, before 2005, a largely forgotten and also largely run-down backwater of greater London. But whether the momentum can and will be maintained post-games remains to be seen. And whatever the impact on east London – and perhaps more modestly in the vicinity of other Olympic venues – some observers are predicting that elsewhere in the UK residential property prices are set to fall – again and further.

!m[](/uploads/story/185/thumbs/pic1_inline.png)This at least is the pessimistic prediction of the International Monetary Fund, in its just-released Article IV consultation report on the UK. For the IMF, the portent lies in two key housing ratios – the price-to-rent and price-to-income ratios. Both remain high relative to historic trends. Noting that the price-to-income ratio is around 30 percent higher than its average over the past 15 years, and this despite the drop in house prices following onset of the global financial crisis in 2008, the IMF says this:

>>Although the above-average ratio can be partially explained by the trend decline in real interest rates over the past two decades and by supply constraints due to tight planning restrictions, historical experience suggests that such elevated ratios do not persist. As such, staff projects house prices to decline relative to income by roughly 10-15 percent over the medium term

The question begged here is of course, what is the ‘medium term’? Something is causing British house price ratios to remain high and four years into ‘austerity’ it can hardly be the influence of a property bubble. The IMF muses that the ‘fundamental’ at work here may simply be the limited supply of new housing stock in the UK and, if that’s the case, demand will continue to exert pressure on prices.

Away from the experts, prognostications on future house price movements are a mixed bag. The Halifax Housing Market Confidence Tracker released on 19 July indicates that 34 percent of British people see prices rising over the next 12 months, with only 19 percent believing that prices will fall. Fifty-four percent of respondents consider that now is a good time to buy.
But these sentiments are not evenly shared across the community. The latest Knight Frank/Markit House Price Sentiment Index shows that people picking prices to fall are strongly in the older age group – above 45 – whereas younger people are much more likely to see continued upwards movement. A possible explanation is offered by Gráinne Gilmore, head of UK residential research at Knight Frank: “The age ‘gap’ between those over and under 45 is perhaps some reflection of how the economic developments are affecting those at different times of their life. It is typically older homeowners who own their house outright or who have paid off a significant chunk of their mortgage.” And, suggests Gilmore, it is that older demographic who are bracing themselves for a further erosion in the value of their primary asset, whereas young people continue to be pessimistic about housing affordability. With justification – newly-released EU research puts Britain as the third least affordable country in the union for housing, behind only Denmark and Greece.
For the next few weeks at least, homeowners and home-seekers can perhaps put aside their concerns and focus on Britain’s home advantage in the 2012 Olympic Games. Come September, the party over, perhaps some clearer trends will start to emerge in residential real estate.

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