UK House prices climb as 3 million sit on the sidelines
The Nationwide bank stated that house prices cooled slightly in October, but still rose by an average of 0.7%. However, the latest three monthly forecast should an increase of 2.6% over the period – the fastest growth since September 2004.
With the average price of a UK house now sitting around £169,623 it seems that there are 3.4 million potential buyers sitting on their hands waiting for a slump in prices before they will buy. Commenting on the report by Abbey, BN drills down on the numbers further.
According to Hometrack’s Richard Donnell there are also signs that the mini-boom in the London market may be coming to an end.
With the dearth of first time buyers –many put off by the need to raise ever larger deposits – most of the slack seems to have been taken up by buy-to-let owners, mainly using the property increase of previous properties to secure deposits for loans on further property. As we’ve noted before, UK banks are actively encouraging this kind of highly speculative borrowing at the moment, as they desperately compete to lend more money.
Of course the problem looming is that the central bank in the UK has started to push up interest rates and is again likely to do this in November – raising the rate to 5%.
With such ‘gearing’ it will only require a small drop in the market to push recent buyers into so called ‘negative equity’. If buy-to-let buyers are unable to repay the loans or prices fall then many landlords will find themselves losing money on the properties and its likely they will want to offload the property as soon as possible, thus precipitating a bigger decline in property values.
Even if properties decline it is unlikely that the pent up demand of the 3.4 million potential buyers will come into the market until the bottom has been found. So for a period of time there will be misery and concern for recent buyers of property and financial ruin for people who have over ‘geared’ in the speculative housing market.
Of course its not all bad news, for those first time buyers prices will eventually become affordable again, and even for those who bought and lost value on a property, the next property up the ‘property ladder’ will now cost less as well (in most cases it will be very much less).
So ironically most of us should still be hoping for an increase in rates and a subsequent drop in property values. Short-term pain for long-term stability and gain.