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Will the housing market crash?
With 2007 drawing to a close, house price forecasts are a hot topic. Most lenders say that prices will continue rising, if at a slower pace than in recent years, but the International Monetary Fund reckons we could be facing a price drop similar to that seen in the US. Ed Stansfield of Capital Economics says the key factors point to a downturn. However, Stuart Law of property investment experts Assetz dismisses these concerns.
Ed Stansfield, property economist, Capital Economics
UK house prices are set to give back some of their gains, with a 3% decline next year and the same in 2009, as higher interest rates and the credit crunch create a property market squeeze. Buyers who would have been approved previously will begin to find it much harder to obtain a mortgage. We have seen house price falls in the US, Ireland and, more tentatively, in Spain and France. I think it's likely that the UK could be next.
If we look at the slowdown in the economy and the housing market that happened back in 2004/2005, the key factors are worse now. Affordability is worse, as we've had continuous house price growth since that slowdown, and we have higher interest rates. So with the economy poised to slow, the downside risks to the housing market are greater.
Add to that tightening credit controls, rising repossessions and the most buoyant part of the market - London - having the rug pulled from under it, and we have a more problematic year or two ahead than most housing market forecasts suggest.
We can see a period of gradual decline in prices over a series of years, but there's a huge reticence in the market to forecast the end of the boom because past experience suggests you need a negative macro-environment to tip the market over the edge. But the experience of the US, where the housing market is much weaker than might be expected based on recent economic performance, suggests that might not always be the case.
Stuart Law, chief executive, Assetz
The IMF's comments are completely flawed as there is no basis for prices going backwards. How can the UK housing market be over-valued and houses unaffordable when people are still paying and prices are still going up?
I expect property prices to rise by around 5% next year, due to the strong fundamentals of undersupply and falling interest rates. The Government forecasts that 4.4 million more people will be living in the UK by 2016, and house builders will not be able to supply enough property to meet that demand, defending robust house prices and even driving them up further.
House prices drop when interest rates go through the roof, but that scenario doesn't look very likely at all. Inflation is always a risk, but oil prices don't have the same impact they used to and over the long term inflation is very much under control. The other factor said to cause prices to fall is the prospect of a recession, but all the economic fundamental indicators are
positive. There is nothing visible that is going to cause a serious recession in the UK or globally. Even if the US went into
something of a recession, the global nature of the market means the UK isn't as tied to the US as it used to be.
Finally, the buy-to-let market is helping to hold up the housing market and rents are rising more than they have in years. Yes, repossessions are increasing, but those properties are being bought by investors. While these sales are at lower prices, people who don't need to sell are not discounting.
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