There are many issues that are generating higher house prices: The housing stock is one such issue, in the UK there are not enough properties to meet the increased demand that has been maintained over the last few years. This is exacerbated due to the fact that there are not enough new houses are being built each year, pushing up the price of existing ones. The issue over housing stock has in turn been affected by the growth in population that immigration has brought about; and this particular issue is likely to increase as the number of people entering the UK is likely to remain high.
However, David Miles, chief UK economist at Morgan Stanley, has recently suggested that the housing market could be heading for a severe decline within the next few years. Whilst conceding that recent house price inflation could largely be appropriated to high expectation prices that are likely to continue in the short term, Miles suggested that a prolonged rise would fail to materialise. There is the possibility that the market could head into a downturn, with prices falling dramatically. He stated: "A sharp fall in real house prices is likely at some point in the relatively near future, though it could yet be one to two years away."
Taking a similar view of the situation in the housing market, the Council of Mortgage Lenders (CML) has urged the government to increase support for mortgage borrowers who fall into payment difficulties. In a recent press release, the CML highlighted the need for the government to renew its commitment to sustainable home-ownership with an aim of enhancing the safety-net for home-buyers and minimizing the numbers of arrears and repossessions.
The Bank of England’s last interest rate rise on November 9th, raising rates to 5%, combined with the increasing cost of petrol and utilities prices in the UK, has added to the widening of the gap between what people actually earn and can afford to pay for property and the current asking prices of properties in the UK.
However, the rise in interest rates is seen by some as a vital measure that will be benefit the economy by cooling the housing market while promoting wider economic stability curbing inflation. The Royal Institution of Chartered Surveyors (RICS) stated that "This interest rate rise, together with possibly one more in early 2007, should help to produce a 'soft landing' for the housing market, giving rise to a more stable market environment for buyers".
On a more positive note, figures from British Bankers Association indicate that October's gross mortgage lending was £18.9bn, some 6% higher than September's figure and 8% higher than the £17.5bn in October 2005, although this annual growth largely reflects the growth of property prices. Additionally, the research illustrated that there were 198,242 mortgage approvals (for all purposes) in October, with an aggregate value of £21.8bn. The number of approvals was 2.3% higher than in October 2005 and their value was 15.5% higher. This highlights a strong consumer interest.
According to the IMF, growth in the UK economy has reached 2.7% for 2006. (November 2006 figure) Currently, the estimated growth for 2007 is also estimated to be 2.7%
The key question is what direction the UK property market travelling, and whether current conditions are sustainable. All investors have their own take on the current climate, but there are several macroeconomic indicators that will have a strong influence on investor’s issues:
The threat that inflation will remain higher than the desired 2%
There is the potential that interest rates will be raised further; the US Federal Reserve rate is already 5.25%, and this has had a great impact on the economy.
Taxes; the amount of tax that the average person is liable to pay is rising, and many new ‘green taxes’ that are being considered are likely to hit middle class taxpayers hardest.
Rising unemployment figures; unemployment has been rising steadily over 2006, despite some growth in the economy, and is now around 4.9%
Stretched affordability; half the population (52%) could survive financially for just 17 days, should they suffer an unexpected loss of income, according to research by Combined Insurance.
Increasing levels of personal debt; at the end of July 2006 the total UK personal debt was £1,237bn.
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