Up, Down, Sideways? What Are The Forces Behind House Price Movement?

Recent press reports provide conflicting information on house prices. Some claim they are slightly, up, others slightly down. Some even say they are moving sideways (that used be called static!). To analyse where they are going lets consider the forces behind house price movement.

For house prices to dip significantly there would need to be a greater pressure to sell at a reduced price. The status quo is that buyers are largely unable or unwilling to pay the current asking prices but the sellers would rather stay put than give a significant discount on their property, hence very low volumes of transactions.

The last time house prices experienced a big correction was in the early nineties when unemployment rocketed and sellers had to sell up to avoid defaulting on their mortgage and herein lies the difference. During this recession increases in unemployment have been softened by employers offering employees short working weeks or salary cuts rather than large scale redundancies. Therefore there are far fewer distressed sales of property to drive prices downwards. Unemployment remains steady currently but it remains to be seen if the government austerity measures have a negative impact on overall employment levels in the coming months.

It is also worth remembering the powerful pressures working in the other direction and supporting house prices currently. Supply has been hugely restricted over the past few years. Vendors have been sitting on their hands waiting for greater confidence in the market before putting their property on the market. Also new homes developers have halved their output during the recession. Fundamentally, basic economics tells us that low supply equals high price.

In addition, the cost of borrowing is very very low in an historical context. The base rate is just 0.5%. By comparison, between 1990 and 2005 the base was double digit for a cumulative total of five years. Affordability of housing for most people is the monthly cost of a mortgage - in other words the combination of purchase price and cost of borrowing. With so many borrowers currently with คอนโดมือสอง substantial mortgages from the 90s property boom it would be a very brave Bank of England that adjusted the base rate much above 5% and therefore sparking an epidemic of mortgage defaults. For many would be home buyers their ability to buy is not limited by what they can afford to pay each month on a mortgage but their access to the very substantial cash deposits currently required. 20% is typical. It is this figure which is beyond a large number of buyers not the cost of servicing the mortgage. If the minimum deposit were to drop the balance of competing pressures would go in favour of house prices rising not falling.