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House prices on the rise?

Posted on Tuesday, August 18, 2009

There have been plenty of stories in the press about house prices starting to rise again. Sorry to disappoint anyone waiting to sell their house, but we just don’t think rising prices will continue. Here’s why.
 
Let’s take the example of a first time buyer. He or she wants to buy a house that was worth £100,000 a year ago, but is now worth only £80,000.
 
The average salary is about the same now as it was a year ago, around £1,500 a month after tax.
 
Assuming a 95% mortgage, a year ago the first time buyer would have had to find a £5,000 deposit. That equates to three and a bit months of net income.
 
This year, banks are a lot more reluctant to lend. First time buyers might find it difficult to get a mortgage for more than 75% of the purchase price. So for an £80,000 house the purchaser will now need to find a deposit of £20,000. That’s over 13 months of net income.
 
So although houses are cheaper than a year ago, they are actually LESS AFFORDABLE.
 
We think home buyers will face difficulty in obtaining finance for some time to come. We also think the effect of redundancies is yet to be felt and therefore demand for housing will remain weak for some time.
 
Like any market, the housing market is driven by supply and demand. House prices have risen slightly of late as supply is very low at present. People know that the market has been falling and have therefore been reluctant to put their house on the market.
 
There seems to be a view amongst home owners that their home is worth MORE than the current price. They’re therefore waiting for the market to recover before putting their house up for sale. Unfortunately, we think they’ll be very disappointed.
 
It’ll take a long time for houses to be worth what they were two years ago. At some point, many of those who were waiting to move will put their homes on the market. Supply will increase, but if demand remains weak there will be further falls in prices.
 
As usual, we have no crystal ball and cannot predict the future but in our opinion, we can see plenty of further weakness in the housing market.
 
Mike Deverell, Investment Manager
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