Are house prices rising? Or is it a lack of supply?

What are house prices doing?

It’s the big question on everyone’s lips. Are house prices rising? Is what the property experts saying true?

Prices have just returned to 2008 prices which makes Ray Boulger from Charcoal the only expert to be correct out of all the experts I surveyed at the beginning of the year. So well done Ray.

Now back to the real question.

We have seen a consistent price rise across all indices since March 2009. It’s now almost commonly accepted that this is when we came out of recession. The property professionals are claiming recovery but economists’ statements have been a little more tempered. And of course, the doomsayers are still saying a further 30-40% which, while I don’t agree, I do think that some of the arguments have merit.

So let’s firstly look at why prices have increased

Put simply, it’s due to a change in perception.

You can explain it with numbers and they will tell you that the supply of housing is at an all time low (that’s because most people are preferring to hold onto their homes rather than sell them at what they perceive as a low price). But forget supply and demand – it’s down to human nature and people wanting to bag a bargain. You might even call it ‘greed’.

The other side is that since January 2009 the general feeling amongst people is that the worst is over and that it’s time to jump back in: the demand side of things.

This market is currently only available to those that have great credit, a great income and a great deal of available credit, and this lack of UK bank lending is restricting the growth potential of the market. This is also on the demand side of things but it also affects the supply side as some people hold off putting homes on the market due to what they perceive as the market.

Now, just for a moment think what would have happened if the banks firstly had the confidence to lend and secondly had the money on their balance sheets to lend. Prices may have shot up even further and the recession could have been over a lot quicker due to a greater demand for borrowing. This of course, would have further fueled demand, putting upwards pressure on prices.

So prices have risen exactly as we might have predicted given the dynamics currently at play in the UK market.

Will prices continue to rise or fall like a stone again?

Let’s take a look at the doomsayers and economists. They contest that values are still way too high as income aren’t increasing and therefore affordability is still too high.

Affordability is the comparison of average house prices with average incomes. Normally you would expect a healthy level to be around 3 to 3.5 times average incomes. Just before the crash they rose to 5.1 times which is way too high. Normally after a recession you would expect them to drop down to around 2.7 times. This is why many economists will point at the “affordability” statistic as proof that the market still has further to fall.

So is “affordability” really a good indicator of where prices should be?

It’s a good indicator but it’s not the only factor. I think that whilst affordability was a great indicator of house prices in the past I think that its power is being diluted nowadays.

I actually think that the changes in the distribution of wealth, the rate of change and the overall understanding of the economic cycles and economic principles are beginning to have a huge effect.

So when affordability was at 5.1 sure something had to give but at the other end I don’t think affordability has to reach 2.7 before we can reset the clock and start the boom/bust cycle again.

Now I haven’t dealt with prices yet. Do I think they will fall further? Well yes and no. My gut tells me that they will hover around the same prices throughout the first 6 months of 2010. The economist in me says they will fall a further 5% but that the market will continue to get better throughout 2010.

But even if prices do fall 5% it won’t affect the market given that most people see this year’s rises as a confidence booster rather than a financial windfall. So even if they drop back down over the winter it won’t concern most people because they never actually counted the gains of 2009 as money in their pockets.. hence they won’t consider that they’ve “lost” it.

My advice is to brace yourself for a drop but don’t be too worried. I certainly cannot see it dropping below March 2009 prices.

Most importantly, in July 2010 prices will start rising, albeit slowly, and we begin the long slow climb to the next boom and the inevitable bust that follows. It’s simply human nature.

So what should you do now? Well – it truly is the time to take advantage of a bargain. Off plan is heating up with healthy rises in developer’s prices being seen with each new phase launched.

If you have any questions or what to learn how to take advantage of the market give me team a call on +44 (0)207 923 6100.

Live with passion,
Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

>