Relentless Housing Market shrugs off all threats
By Damian Clarkson    17th May 2007

Mounting pressure from numerous corners will bring about the long-overdue UK house prices crash, analysts claim. Unfortunately, no one bothered to tell the market.

Against the backdrop of interest rate hikes (with another predicted) and the housing market freefall across the pond, property prices in the UK have risen by 10.9% in the last 12 months alone.

According to the Halifax house price survey, the average house price in the UK now stands at £196,745. So where to from here? Are there any market threats that will impact on pricing, and can struggling buyers expect any relief?

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Threat #1: Interest rates
The Bank of England rose interest rates by 0.25% to 5.5% in early May. That marked the fourth rate hike since August 2006, and meant the typical homeowner with a £100,000 mortgage was shelling out an extra £64 every month.

Fears that homeowners would battle to make repayments were fuelled when it emerged the latest hike had failed to slow the housing market as much as expected, sparking rumours of a further hike later this year.

But even if that hike transpires, most analysts feel the fact housing demand far outstrips supply will largely negate its effect.

"Interest rates would have to head above 7% for a significant number of people to start to really struggle with their mortgage and I can not see any factor which could prompt such a rise in rates," says Capital Economics analyst Ed Stansfield.

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Threat #2: Housing supply
Market prices are determined by supply and demand, and at the moment the UK is desperately short of housing, thanks to a combination of increased longevity, immigration and changing lifestyles where more people live alone.

So with limited supply one of the key catalysts of the price boom, Gordon Brown’s claims that he planned to build an extra 30,000 homes every year led some to question whether that could bring prices down to earth.

It remains to be seen just what effect this will have, but even if Brown does reach his target of 200,000 homes, he would still fall well short of the 240,000 needed to meet demand, according to charity, the Town & Country Planning Association.

So again, unless he exceeds his targets – at a time he will have so many other things to focus on in his fledgling Prime Ministerial career – it seems unlikely this will be the final nail in the coffin for exorbitant prices.

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Threat #3: US price crash

In the US, lenders are restricting the money they lend to mortgage borrowers, reducing the number of potential buyers - and thus demand.

So supporters of the idea that “when the US sneezes, we catch a cold” pointed to the fact property prices were falling at near record speeds as proof that a similar trend awaited us.

That has so failed to happen, and as the months drag on it becomes less likely that it will. This is because of two key differences: UK lenders have been more prudent than their US counterparts, and the second is that famous lack of housing over here.

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Threat #4: HIP-atitis Perhaps the most tenuous of all the threats, some players in the property market claim the arrival of Home Information Packs in June will trigger a house price crash the likes of which have not been seen since 1991.

The theory is that HIPs will deter would-be sellers, massively impacting valuations. Considering the average house price is nearing £200,000, and HIPs will only cost around £500, this seems highly unlikely to say the least.

Underlying base still strong The enormity of the boom beggars belief: Prices have shot up 204% in the past decade, compared with a 94% wage increase, according to the Office of National Statistics.

And despite an increasing number of threats, the market has recorded a consecutive price increase for the last 18 months.

The bottom line is that, whilst the economy remains in its current state - low interest rates and inflation, relatively high employment - the price crash buyers so desperately seek is likely to remain out of hand.

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Article produced by EveryInvestor.co.uk