I thought I'd write about house prices because it seems, to me, that we're heading towards something of a Mexican standoff between buyers and sellers.
Why house prices should fall
In the current climate there are a number of factors that make falling house prices seem almost inevitable:
Taxes & unemployment both look set to rise
If you lose your job you're unlikely to go out and buy a home, plus the threat of unemployment will probably deter many from buying their first home or upgrading their existing until the prospects for our economy look a bit rosier, which could take a while. Both factors will reduce demand for housing, putting downward pressure on prices.
A tough economic climate will also, sadly, see a rise in repossessions. If this happens on a large enough scale it will likely push down property prices due to increased supply and desperate sellers - as has already happened in the US.
Prices have become over-inflated
The average house price is currently about six times higher than average earnings - double the mid 1990s level. Cheap borrowing has fuelled a self-perpetuating bubble, with many only too happy to borrow excessively and jump on the rising house price bandwagon. At some point more expensive borrowing will firmly burst the bubble, but for now interest rates look set to remain low so I think the more important point is the barrier to entry that high prices present for first time buyers.
It generally tough to borrow more than three times earnings at the moment, so average earners will struggle to buy average homes unless they've saved up a massive deposit. And without the prospect of soaring prices and future profits tempting them to buy, this end of the market could continue to dry up. Again, resulting in lower demand.
People expect them to
If you expect the price of something to fall then you'll either wait and buy when the price has fallen or offer a lower price now. Either way, this puts downward pressure on house prices.
Why they might not, by much anyway
But there are also factors that might help prop up prices:
Sellers are reticent to drop their price
Having seen their home soar in value, many sellers are reluctant to reduce their asking price to realistic levels. Or, if they've made little gain (or a loss) and have a large mortgage they probably can't afford to. As their home is unlikely to sell, it reduces the supply of housing that realistically could, helping to keep prices firm.
Interest rates look set to stay low
Despite grim economic prospects, if interest rates remain low then the majority of homeowners will continue comfortably affording their mortgage - reducing the risk of financial pressures forcing them to sell. It also means that those with sufficient earnings/deposits can afford to pay the current high prices - although they obviously might choose not to.
Resurgence in buy to lets
Low interest rates, decent rental yields and an uncertain investment outlook have sparked a resurgence in buy to let investing. With rental yields currently around 5% and high demand due to more people postponing a house purchase, some investors are favouring buy to let investments over stockmarkets and cash in the bank. This is boosting demand for suitable properties at the low to mid end of the market, which could mean prices being more robust than expected.
High cost to move
In the past it's been common to move house in order to trade up or down the housing ladder, either realising a juicy profit or hoping to make one. Such profits have outweighed the hefty costs of moving, which can run into tens of thousands of pounds after paying stamp duty, estate agent and conveyancing fees. But without the lure of rising prices many will simply stay put, unless they really need to relocate or downsize. This will reduce both supply and demand, but fewer properties coming to market should provide some support for prices.
What I think will probably happen
I have little doubt that house prices will generally fall by at least 10-20% over the next couple of years and maybe even more beyond (especially if interest rates rise). But I expect this will be gradual rather than a crash for the simple reason there will be so few serious sellers in the housing market.
House prices can only fall if they're actually sold and therein lies the problem. After prices fell during 2008/09 many potential sellers simply didn't bother, thwarting the supply of decent properties. Buyers wanting to buy a nice home suddenly found they were in competition with each other as there wasn't enough good stuff to go around, which pushed up prices. This led to a mini resurgence in prices earlier this year, prompting those potential sellers who'd been sitting on the fence to put their properties on the market, often at unrealistically high prices. The resulting over supply has since pulled back sale prices and we now seem to be hitting an impasse.
A quick surf on 'rightmove' (if you like rightmove, try out www.property-bee.com) suggests there are plenty of properties for sale, but few nice ones at sensible prices (if you believe prices are more likely to fall than rise). There are also few serious buyers, because they either can't get a mortgage, are holding off until prices fall or can't sell their existing home.
So I think we'll see a few exceptionally nice homes still sell fairly quickly at high(ish) prices to the few buyers who really want them. Some decent properties that would have sold quickly in the past will probably sell, in time, provided the sellers are happy to accept low offers that reflect an anticipated price drop (these types of sale will drive down the main house price indices). But volumes will be low by historical standards. And the vast majority of properties, either unpleasant or where sellers are stubborn on price, will simply remain unsold.
I think a crash would only occur if we see a massive spike in forced sellers (i.e. repossessions). While this has occurred in parts of the US, the UK has a far better social security safety net so I can't see the same happening here.
As a parting thought - I doubt prices will fall significantly long term as we're stuck in a generation that's obsessed with their home being an investment and if the population grows then so will demand. So we might start to see a fundamental shift towards renting rather than trying to jump on the property ladder, as is the norm in Continental Europe.
Oh, and if you're about to buy a home then bargain very hard!