News: FTBs face harsh home truths

Mon, 22 Oct 07

The National Housing Federation published some research recently called Home Truths stating that house prices in the UK will rise by 40% over the next five years to reach £302,400...

This would make it significantly more difficult for first time buyers to get a foot on the property ladder.  Millions of FTBs are already having problems, so this will not be good news at all.

Although it doesn't state it, this is equivalent to a rise of 7% per annum on average which over recent years is a reasonable average.  However, given the good recent run in the last few years, investors should factor in 4% or 5% average growth for the next five years which might lead to a compounded 27% rise in capital values over the same period. On a typical £200,000 property this would lead to capital growth of £54,000 to £80,000 over the next five years per property.

At the same time, the IMF is saying that UK property is overvalued by as much as 40% - we all know however what would happen if property was 29% cheaper (the equivalent of 40% overvaluation) - there just wouldn't be enough property to go round with the level of demand this would provoke.

Interest rates expected to fall

The rules of economics governing supply and demand in a free market would dictate that it would be impossible for prices to reach this low level before increased demand stabilised prices. A similar effect was seen between the summers of 2004 and 2005 and at the first sign of price weakness, increased demand began to drive prices upwards again.

Interest rates are expected to lower in the UK imminently and strong further reductions are expected in the US and doubtless elsewhere in the world over the next six months to a year. The risk to the growth projections depends upon interest rates not going up dramatically.

Given the relatively muted response in the mortgage markets to the recent credit crisis it is likely indeed that rates will lower; property is not overvalued and we are likely to see significant growth in years to come, driven by the inability of house builders through planning constraints to build enough property for the demand present in the UK economy.

Stuart Law – http://www.assetz.co.uk


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