Where are house prices heading?

The graph at the foot of this page shows the percentage of the Nation's average take home pay spent on the Nation's average mortgage payments.

House prices fall when the cost of property ownership is unaffordable (either through higher interest costs, having to borrow more or loss of income).

Lets look at some key points in the graph...

• The last big crash was in the late 80's. Leading up to this property prices increased significantly - a rapid spike is evident
• From the mid 90's property prices rose sharply again but the spike takes much longer to form, this is because interest rates fall sharply (lower interest payments make a mortgage more affordable).
• From 2005 interest rates started to increase and affordability was becoming more stretched, first time buyers could no longer put a foot on the housing ladder. The spike starts to accelerate as it becomes more expensive to own a property
• October 2007 and the banking crisis hits, house prices start to fall then interest rates fall dramatically towards the end of 2008. The graph trends down as affordability improves and during the summer of 2009 we start to see a return of the first time buyer.

Where are house prices likely to go from here?

Interest rates are at an all time low and are likely to increase as we come out of recession. At current levels of affordability it will not take much to reach a level at which property is less affordable (we are in the top quarter of affordability on the graph) and this will depress property prices.

What do we think will happen?

Property prices will remain flat but could fall further when interest rates start to rise...

• if affordability returns interest rates will start their rise
  (depresses affordability, house prices fall)
• If interest rates rise too much it could force a second wave to the recession, Government is unlikely to go too far with interest rates
  (supports affordability over time, house prices rise)
• There is a lack of money available for mortgages, lenders will put interest rates up to slow increased demand
  (depresses affordability, house prices fall)
• There is a shortage of property
  (house prices rise)
• Unemployment may rise further throughout 2010, particularly public sector jobs. People may be forced to sell.
  (over supply, house prices fall)
• Recent property price rises may have identified the bottom of the market but this could be a false dawn as frequently seen when share prices temporarily recover from a fall.
  (possible support for prices but it is still early days)