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Where will house prices go in 2008?
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Discussing just how much your home was worth compared to when you bought it a few
years earlier might be a favourite dinner or pub conversation topic, but if some
pundits are to be believed, it may not be for much longer. |
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After more than a decade of rapidly-escalating values, property prices finally appear
to be flattening out. Indeed, the suggestion from some experts is that they may
even drop. Although the extent of that potential fall is not clear, one or two are
claiming that residential property is over-valued by as much as 25%. |
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How likely is it that property will fall? |
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The evidence certainly suggests that we are highly unlikely to see the kind of gains
experienced since the mid-1990s. According to Nationwide, an average UK property
costing £100,000 in the third quarter of 1997 would be worth £303,000
today, effective compounded gains of about 20% a year. Halifax's own index has recorded
gains of 213% over the same period. |
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Compare the best mortgage rates for first-time buyers |
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Even in 2007, overall prices rose by between 5% and 8%. However, for 2008, Nationwide
suggests a market without increases, which in effect means a cut once inflation
is taken into account. |
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The key factors identified as causing this slowdown are a combination of the following: |
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A global economic slowdown, partly caused by the so-called subprime crisis in the
US and exacerbated by rising energy prices, may lead to a slight rise in unemployment.
People will feel less confident about buying or trading up, even if the Bank of
England cuts base rates in 2008 by as much as 0.5 percentage points, as predicted
by the Council of Mortgage Lenders. |
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The credit squeeze, also originating in the US, means that lending is being curtailed.
This does not create vast problems for existing borrowers: those most affected are
people who would normally find it difficult to obtain loans in the first place.
However, one key affected category is that of first-time buyers, for whom there
are far less 100% mortgages, or loans available on extreme income multiples of six
or seven times earnings.
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Even if such loans were still available in the way they were, they may well cost
more - risk premiums have increased - and in any case, first-time buyers are not
currently willing to enter the market. Prices have risen ahead of affordability
and would-be buyers are unwilling to climb on the first rung of the property ladder
if they believe they may either face financial difficulties or that prices may dip
in the year ahead.
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Buy-to-let investment, a significant source of support for the market in the past
five or six years, is drying up. Separate research by Paragon Mortgages and the
Bank of England shows how back in 2004 the effective mortgage rate of buy-to-let
properties stood a 4.5%, while gross rental yields, the income received from a property
relative to its price, stood at about 7.25%. Today, both sets of figures are clustered
at about 6%, while the potential simply to raise rents is not there.
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If all this sounds terribly gloomy, it should be pointed out that there are some
countervailing factors. The first is that potential demand for properties continues,
while the supply of new housing, whether in the rented sector or for sale, lags
significantly behind. |
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Housing shortfall
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The government's housing green paper says the current level of house building is
falling short of projected "household formation" - the number of couples deciding
to live together or, sometimes, splitting up - by 38,000 units per year. Although
the green paper has committed to raise growth in the housing stock from 185,000
units per year to 240,000 units by 2016, this is a long-term project and it will
not affect shortages in 2008. |
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The second point to mention is that in a tighter housing market, the reaction of
many potential sellers is simple: they won't put their properties up for sale. Estate
agents in some areas are reporting up to 20% fewer homes available for sale compared
with 2006, according to the Royal Institution of Chartered Surveyors (RICS). |
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Therefore, far from a glut where buyers can pick and choose and drive prices down,
an equilibrium of sorts' remains in the market, with supply still not meeting demand. |
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Historical precedents
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Finally, it is worth looking back to the property market crisis in the early 1990s,
when prices dropped by 20% or more, to see whether the factors apparent then apply
today. Back then, unemployment was rising sharply while interest rates reached a
peak of almost 15%. True, prices were far lower, but housing affordability for people
in work remains greater than it was then. |
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All this suggests is that while we may not see anything like the double-digit gains
experienced in recent years, the market is far more likely to resemble that in 2005,
when it remained flat for most of the year, rather than 1991 when there were 75,000
repossessions. |
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There may be less to talk about at dinner parties, but that's probably a good thing:
it means we can all watch our neighbours' fascinating holiday videos instead. |
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MY-FLAT.CO.UK RENTAL PRICE COMPARISONS:
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My-flat.co.uk VS Major Competitor |
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Winter Rates (15th September - 1st April) |
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1 Bedroom £900 - £1100 (my-flat.co.uk £600 - £800)
2 Bedroom £1100 - £1300 (my-flat.co.uk £1,000 - £1,250)
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Summer Rates (1st April - 15th September) |
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1 Bedroom £1100 - £1300 (my-flat.co.uk, £800- £1,000)
2 Bedroom £1300 - £1500 (my-flat.co.uk, 1,100-1,350)
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