UK house prices

JTrader

JTrader

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Hi

I know relatively little about the housing market.

I will be looking to buy a house within the North of the UK over the next 2-3 years.
The rise in house prices over the last 3-4 years has shocked me and many others I expect.

I find the prospect of buying a house a scary business.

If the UK housing market has peaked, I feel very sorry for those people who have gotten onto the housing ladder at the peak and are now faced with being stretched to the very limit - if interest rates continue to rise.

I am aware that other issues are affecting this housing boom/crisis other than interest rates. These include the fact that we live on an overcrowded small Island. Peoples living patterns have changed - more single people want to buy a home. Not enough houses are being built to keep up with demand and places where housing can be built are limited now - due to issues with greenbelt land.

I would like to hear the opinions of people with more knowledge than myself. My questions are -


What do you see happening with the property market, prices and interest rates over the coming years?

If you see house prices coming down as higher interest rates are introduced, by how much do you see prices coming down by?

If interests rates were to return to the pre-property boom rates of 1998/99-2000, what level of retracement in average house prices would you expect to see?

To what extent are house prices/will house prices be controlled by interest rates?

I assume that a high interest rate economy equates to a low value housing market and visa versa. From a home owners point of view which is best - low house prices and high interest rates, or high house prices and low interest rates?

Over the course of a 25 year mortgage, how many property boom and property recession cycles is a homeowner likely to experience? i.e. how long do boom cycles and recession cycles historically tend to last in the housing market?


I have come to the following theoretical conclusion -

It doesn't really matter if house prices are high or low to mortgage holders/homeowners because when house prices are high, interests rates are low, and when house prices are low, interest rates are high. Under both scenarios, a homeowner/mortgage holder would end up paying back approximately the same amount to the bank/building society over the couse of a 25 year mortgage.
The only real problem when house prices are high is that people are unable/find it very difficult to borrow the amount of money needed in order to buy property - as house prices move out of kilter with salaries and the amounts banks/building societies are prepared to lend.

Is this an accurate theory? which parts are right and which parts are wrong?



Many thanks :)

jtrader.
 
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The only reason there has been a boom in property is that interest rates were low, and the British aren't dissuaded from speculating. There are assets bubbles the world over because of cheap money, but bubbles go pop when money becomes more costly. People tend to believe the lenders/agents/chancellor's bull****e that the boom was because of people all of sudden needing to move, the population's property problems the day before the boom were in fact there for some years, but people apparently felt it was time to resolve these once money became cheap. Once the greed takes over, you'll find people arguing the value of a cupboard in Kensington. There is only one way this is going to play out as inflation creeps in.


With the Internet you can trade from anywhere in the world, why dig yourself into a UK hole?
 
Thanks Zigglewigler

Pardon my ignorance, but what, if any, is the relationship between interest rates and inflation? - does a rise in one automatically lead to a rise in the other?

"why dig yourself into a UK hole?" - Where else would you suggest and why?

Thanks

jtrader.
 
Read below and take your pick..maybe outer mongolia is still the bargain of a lifetime


Global house prices still rising


Towering above the rest - Hong Kong property prices reach for the sky
As the sun looks ready to set on the UK housing boom, global house prices are still rising at a dazzling pace, a report in the Economist said.
House prices are increasing at double-digit rates in 11 of the 20 countries featured in the magazine's latest quarterly global house price survey.

Hong Kong is top of the league with a 28.7% annual gain, followed by South Africa (25.5%) and New Zealand (22.1%).

The UK trails behind in sixth place with a 13.8% gain, down from 17.6%.


Home prices are now at record levels in relation to average incomes in the US, Australia, the UK, France, Ireland, Holland, New Zealand and Spain.

'Overvalued'

Homes both at home and abroad are more overvalued today than at previous market peaks, from which prices typically fall sharply in real terms, the magazine said.

"Add in China and South Africa, and two-thirds (by economic weight) of the world that we track now has a potential housing bubble", says the Economist.

Hong Kong's house market has undergone a dramatic turnaround since the 17% decline seen in the previous year.



However, the Hong Kong housing market bubble burst in the mid-1990s and average prices today still stand 55% lower than in 1997.

In the second quarter of last year, Australia topped the Economist's house price table but it has dropped to the middle of the table as the country's boom tailed off.

Meanwhile, US house price inflation accelerated to 9.4%, the steepest rise since the 1970s.

This increase seems tame compared with gains seen in the UK or Australia, but, in fact, the US is going through the biggest property boom in its history.

However, the US market is less vulnerable to a crash in the property market because mortgages are set at fixed rates, making homeowners immune to changes in base rates.

Property markets have hit heady heights for some time in Ireland, the Netherlands and Spain, but recently prices have raced ahead in France, Italy and Belgium too.

In contrast, prices have fallen in Germany, Japan and Singapore over the last year, the survey showed.


Footnote..by the way note the comment prices in relation to average income...NOT average disposable income...big difference
 
jtrader said:
what, if any, is the relationship between interest rates and inflation? - does a rise in one automatically lead to a rise in the other?
Click to expand...
Not necessarily. Interest rates can be used to limit inflation. But they have to be implemented with that intent. As a causative remedy rather than as subjective - in which case they are a symptom of inflation.
 
chump said:
Global house prices still rising

Towering above the rest - Hong Kong property prices reach for the sky
Click to expand...
Until the pro-democracy show a verifiable increase in support at which point you can imagine the governing regime may well decide enough is enough and start to sharpen the knives in readiness for dispatching the golden goose.
 
The summer of 1988 was drawing to a close and house prices were booming as never before - more than one-third up on the previous 12 months.

The gurus of the housing market. Yes, there were one or two Jeremiahs who said the boom was bound to end in tears, but those at the heart of the sector - mortgage lenders, estate agents, surveyors - seemed adamant that none of us should fear a crash. back in 1989

Lets look back in time.at some late 80s press. the National Association of Estate Agents, led the charge against the doom-mongers. 'In the next 12 months, house prices will rise by between 12% and 15%. The market is strong.'

Nationwide Anglia building society, conceded only that 'the market is set to cool'. He thought that prices would rise by ten to 15% in 1989.

The Royal Institution of Chartered Surveyors went as far as to admit that the London market was looking sticky, but there was no evidence that prices were falling.

And as the year drew to a close, the Halifax - then still a building society - predicted that prices in 1989 would rise by 10%.

Now fast-forward to April 2004. Again, house prices have boomed - the only argument is over the scale of the increase, with Nationwide putting the figure for the past year at 16.7% and Halifax reporting 18.5%.

The similarity between the housing market predictions then and the forecasts now is striking. Indeed, they are virtually identical. No one connected with the house-buying or mortgage-lending industries appears to accept the possibility that if the market turns, it might turn suddenly and dramatically. *

'Anyone buying in 1989 had to wait nine years to see the money value of their house restored'
**
*
CJ
 
You have missed one critically important and heavily influencing factor and that is interest rates which were much higher in 1988 than they are now. In my view this is the pivotal factor as it was when house prices previously collapsed. The issue being that when interest rates rose to 17% the number of people who could not afford the mortgage payments caused a sudden drop in prices. We are not yet at that point but I have no doubt that if we started seeing ongoing increases in interest rates then the "Buy to Let" crowd would be first to have to jump ship which in turn will cause a quick move down in prices on a general scale.


Paul
 
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One small point, in response to jtrader's original post, from someone who moved from the South to the North (from Hampstead, London to Leeds) two years ago: if Leeds prices are at all representative of "the North" I think that 3 years from now might be a very good time to buy in the North, and that right now is probably a pretty bad time.

I always try to keep up to date with developments in property values. I'm no expert but probably well-informed for an "interested amateur".

Property prices in Leeds, especially in the better parts, have absolutely shot up over the last two years but are now showing all the signs of cooling off a lot. The last quarter's growth is the least for a couple of years and volume of sales is also down (presumably because of interest rates creeping up). Estate agents round here are offering extremely favourable terms at the moment because it's a pretty bad market for them (sales, I mean, not rentals).

I got lucky and (to my great surprise) sold a really bad small flat in London at my high asking-price to a developer who spent a bit too much on doing it up and then had very great difficulty re-selling it. I got lucky here too because my house has gone up more than 40% in value in less than 2 years. I feel it's very likely that the next 2 - 3 years will see very little further increase, though. My conclusion, therefore, is that now is a bad time to buy in the North and in 2 - 3 years time it will be "better value" at about the same price, with a market that is more likely to show future gains than is the case right now, if you see what I mean.
 
Paul,
"You have missed one critically important and heavily influencing factor and that is interest rates which were much higher in 1988 than they are now"...this is nearly correct in the sense it has a major impact on the the actual central factor that drives this issue..that is..the relationship between house cost and net disposable income...affordability factor..many people seem to have ignored the fact that house prices generally were virtually static for a long time whilst people's net disposable income was rising...a move to balance that was virtually inevitable given supply and demand as they exist...what we don't now know is whether we now have a serious imbalance in the other direction and if so how that in turn will be brought back into equilibrium...
 
chump said:
However, the US market is less vulnerable to a crash in the property market because mortgages are set at fixed rates, making homeowners immune to changes in base rates.
Click to expand...

Recent reoprts suggest quite a sharp increase in the use of ARMs (adjustable rate mortgages) in the US, rather than traditional 30-year fixed rate mortgages, in order to make housing affordable near term. Similarly, in the UK there has been a significant rise in self-certified mortgages.

My personal opinion? We are clearly nearer the top than the bottom of the cycle. Whether or not we have peaked is something of a moot point. Look at the economic fundamentals for the UK and US - how much longer can they continue without raising interest rates and/or taxation levels? (You can include the cost of insurance and oil in the "taxation" bracket)

One question asked was which is better from a home-owner's point of view: low interest rate, high property price or high interest rate, low property price? The answer depends on whether you are buying or selling, and, as a home-owner, preumably you would be selling, so clearly low interest rate, high property price is the better.

No asset bubble can continue indefinitely, but they do tend to last longer than most expect.

Alex
 
AlexAndrews said:
One question asked was which is better from a home-owner's point of view: low interest rate, high property price or high interest rate, low property price? The answer depends on whether you are buying or selling, and, as a home-owner, preumably you would be selling, so clearly low interest rate, high property price is the better.
Click to expand...
Good points Alex. But a clarification needed I think.

We need to differentiate between a home-owner and a property-owner.

A home-owner is (unless moving abroad or into rental) simultaneously selling & buying so it's swings and roundabouts in that the soaring/plummeting value of each property cancels out each side - your sale and your purchase. No net gain or loss.

Low-interest / High property price is great for home-owners, but bad for first-time buyers who also find high-interest low-property price just as daunting.

Buy-to-let if doing so with little to no leverage requirement do well in high interest times (more renters than purchasers) but suffer if they're mortgaged to any great degree. On the flip side of this,even if not leveraged (in high interest times) where lower property prices are experienced is the diminished capital asset value of their properties.

All in all, it's just like trading. You'd like to sell at the top, buy at the bottom. However, unlike trading - you don't have to trade, but you do have to have somewhere to live. If you were totally dispassionate about the whole affair you could sell at the top (or as near the top as you could best judge - which isn't now - it was a couple of years back) and then go for a fixed-rate fixed-term rental, wait for the property price slow-down or fall and then buy back in.

But if you were that savvy and could get the timing just right in that, you wouldn't be messing around with awkward commodities like housing, you'd be doing your stuff in the financial markets.

I no longer deal in UK property. It became more trouble than it was worth to me some years ago when I compared it with the benefit/effort of property ownership and management abroad. I now treat my UK home simply as that. A place to live. Regardless of prices going up or down, whenever I decide to move and if it's to somewhere else in the UK, my current home, whatever it's worth will provide exactly the same purchasing power for my next property in relative value terms.
 
Thanks everyone.

In terms of buying and selling, have I got the following understandings more or less right?.......................

As with trading financial markets - when supply begins to exceed demand, prices begin to fall. When demand begins to exceed supply, prices start to rise?

When interest rates are high, house prices fall because supply tends to exceed demand due to buy to let investors getting out near the top of the market, perhaps triggering the fall in prices, and some homeowners have overstretched themselves in their borrowing, and have to downsize their homes?

When interests rates fall, house prices start to rise because investors and homeowers see this as an opportunity to buy investment property, or to upgrade their home, while borrowing from banks/building societies is cheap and the housing market is going up?

Thanks

jtrader.
 
I also have another question relating to property - sort of.......

I know somebody (definately not me) who has part inherited an estate - which they have had to pay inheritance tax on. The value of the property is in actual fact considerably higher than what it was valued at for the inheritance tax calculation.

If they were to sell the propert now (after 2 years), they would be liable to pay additional inheritance tax.

However, if they wait a few years before selling, they will/may get away with not paying additional inheritance tax.

My question is - how long do they need to wait or how long should they wait before selling, in order to avoid having to pay additional inheritance tax?

Thanks again

jtrader.
 
I believe that it won't be "additional inheritance tax" under discussion here, it will be Capital Gains Tax. I also believe that they can be exempt from this simply by designating it their "primary residence" in the tax-year in which they sell it. This will, however, mean that they can't _also_ sell another property free of CGT within the same year. One can only do this once a year, I think, but one can "designate" a residence "primary" withut necessarily having lived in it at all. Perhaps a passing accountant can advise further and/or better ...
 
Strictly speaking you should be prepared to furnish any documentary proof requested to show that you did actually live in the property that you have designated to be your primary residence..this means the usual type of utility bills ,demands for council tax etc. As to the duration you lived there to qualify for exemption from CGT. This is a little more 'grey' and I think you will be hard pushed to find someone who will give you a specific time period. I have known of people who lived in a property for as little as 6 months and qualified. I suspect that to make that work you really need to be convincing with your documentary evidence. The more you make it look like an avoidance paper manouvre the less likely you are to succeed.

Cheers
 
jtrader said:
Thanks everyone.

In terms of buying and selling, have I got the following understandings more or less right?.......................

As with trading financial markets - when supply begins to exceed demand, prices begin to fall. When demand begins to exceed supply, prices start to rise?

When interest rates are high, house prices fall because supply tends to exceed demand due to buy to let investors getting out near the top of the market, perhaps triggering the fall in prices, and some homeowners have overstretched themselves in their borrowing, and have to downsize their homes?

When interests rates fall, house prices start to rise because investors and homeowers see this as an opportunity to buy investment property, or to upgrade their home, while borrowing from banks/building societies is cheap and the housing market is going up?

Thanks

jtrader.
Click to expand...

Generally speaking, supply and demand will dictate prices in the housing market as in any other. What you need to bear in mind is affordability: since most property purchases are leveraged transactions (mortgages), the amount a potential buyer - or indeed owner - can afford will in large part be dictated by the mortgage rate and hence the mortgage payment. But the property market will not turn on a dime in the same way that interest rates can and do. As we have seen, the cycles can be pretty long.

Alex
 
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