UK House Prices: There is Only One Realistic Forecast

Well, the latest news on the UK housing market is that Savills are forecasting house prices will fall sharply next year, before resuming solid growth in 2011, which will accelerate in subsequent years. And research body Hometrack have revealed a 0.2% growth in house prices in October, but also found that demand is beginning to decrease, which could dampen the upward pressure on prices.

For once I actually agree with Savills. Mostly because they are forecasting what I forecast a couple of months ago (glad it is on an external site), that a second dip will come in UK house prices, and that it will only be turned around by the economy reaching the point in a recovery when employment turns into positive growth, which I also said would be 2011 -- mid-2011 to be precise.

As for Hometrack: I trust their data because it is well presented and apparently impartial. So, if Hometrack says demand is beginning to drop off then there may be trouble ahead. The recent rise in houses has always been supported by a marginal increase in demand meeting a massive shortage in supply. Therefore if demand decreases -- even marginally -- it will lead to a second dip in UK house prices.

Anyone who takes a logical and impartial look at the UK housing market will come to a similar conclusion; the conclusion that a second dip is inevitable. There are just too many things that are likely to trigger it:

• Unemployment:

  Because it will either lead to a rise in supply from repossessions, or a fall in demand because of the obvious, or both.

• Restricted mortgage lending:

  Because it will lead to a fall in demand when cash buyers dry up, including foreigners who will disappear if the pound strengthens -- though that is only likely to happen when the economy is really recovering and unemployment beginning to fall.

• Affordability:

  When the downturn began the average mortgage repayment was taking 136.2% of a first time buyers salary. The last correction brought it down from 147.7% to 60% before prices rose for any more than a month or two, and down to 46.2% before the market truly began to recover. The current correction had taken it down to 91.6% before prices started rising and pushing it back up again.

I could go on, but you can come up with the rest yourself. If anyone can present as many reasons to support the current price rise becoming a full recovery please feel free to do so with a comment below.

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