While we will undoubtedly have a tougher economic environment ahead of us in 2008, the UK housing market will remain steady. UK house prices as a whole are likely to flatten over the next six to nine months and should pick up modestly thereafter.
Prices realised may have dropped relative to asking prices, and it is possible that prices may fall in certain areas of the UK for certain types of property. But this is a long way from a fall in prices across the country and a full blown house price crash.
There are a range of factors that will continue to support UK house prices:
First, there has not yet been a marked shift in the balance between supply and demand. Demand from first-time buyers and home movers has been softening this year and this trend looks set to continue, leading to a fall in the number of house sales. But the number of houses for sale has also fallen: limiting any excess supply in the market.
Second, the UK economy has grown more strongly than expected in recent years - so we are starting from a solid position. Despite some moderation over the next year or so, growth is expected to continue at a reasonable pace. This will support employment and income growth; they may not be as strong as over the last two years, but we are extremely unlikely to see a significant rise in unemployment. This, in turn, will contain the number of forced sellers due to deteriorating personal finances.
Thirdly, interest rates are now expected to fall over the course of next year, a significant turnaround from the position just a few months ago. This will reduce stress on household finances and also limit the number of distressed sales. Lower interest rates will make it less expensive to take out a mortgage, further supporting the market.
Finally, we have a severely constrained housing supply in the UK. We haven’t been building houses as quickly as demand for housing has increased. The number of homes added to the housing stock each year has consistently fallen below the number of new households created for more than a decade. This pent up demand will continue to provide underlying support to house prices in most areas.
There is a very recent precedent for a slowdown. In 2005, against a much weaker economic backdrop and a similar 1% rise in rates over the preceding year, house prices slowed sharply but did not fall, despite many commentators predicting they would.
There is no doubt that in the year ahead we are likely to see a considerably softer housing market than we have experienced over the past decade. But there is a significant difference between a stable market, where prices are possibly even a little higher, and declining prices where people put off buying for the foreseeable future in response.