The Property Market : Property Mark

The Property Market

Beautiful homes in the UK

Introduction

The British residential property market has experienced massive price expansions over the past few years (starting around 2000/1) with house prices often expanding at a rate of 20 per cent per annum. Since early 2005 the market appears to have begun to cool (with prices remaining relative static and dropping in some cases). Total residential housing stock represents over 22 million units as of 2005, with approximately 134,000 new houses built p.a. (based on 2002). The British Government has launched two reviews of the housing market, due to a perceived market failure (only 134,000 new builds for 179,000 household formations), the Barker Report (supply issues and what can be done to increase flexibility in the market) and the Miles Report (the UK mortgage industry and how it can be made more long-term). Issues of social exclusion have also arisen in recent years, especially for critical personel (nurses, teachers, police, etc.) in most areas (both urban and rural).

There has also been uneven growth in house prices, both in regional terms (London has not seen much growth in the past few years, whereas the North of England and Scotland have seen dramatic rises) as well as affordability issues for locals (such as in the Highlands, where second-home buyers have nearly priced out of the market the local population). In some cases buy-to-let investors and second-homes buyers are the cause of house-price inflation, but there remains the simple problem that insufficient housing stock is built as compared to household formation. Areas with low density (especially those desired for their natural beauty) are having a harder time dealing with the present housing/household ratio, as simply building more houses is often politically impossible or undesirable.

Debate

The health of the British residential property market is seen as an important factor in the British economy.

Residential property prices in Britain have risen dramatically between 1996 and 2005. Many commentators (property bears) believe that in part this is not due to economic reasons but to a bubble mentality among speculators.

Other commentators (property bulls) claim that the rise in prices is a rational reaction to high employment, economic stability and low interest rates.

Affordability Ratios

A number of ratios have been developed to judge the sustainability of house prices.

* Proportion of Average Income. The long term average ratio of average house prices to average annual incomes has been 3.5. In 2005 the ratio was around 6 - leading to some analysts claiming that house prices were overvalued by about 40%.

* New Mortgage Cover. This is the ability of a person on an average wage to cover a mortgage for a "first time buyer" property (that is one that is somewhat below the average specification). Currently it is around 30% of post tax income, compared to 39% in 1989.

* Comparable Large Purchases. House Prices are often compared to the cost of other large consumer purchases (often new cars). This is more inexact, because of qualitative changes in many of these other purchases, but indications are that a house is historically highly priced in comparison to other consumer goods.

* Rental Yield. This is the market rent for a property divided by its price, or the average market rent divided by the average house price. Due to the popularity of buy to let this has become a popular measure. This is now around 4% (the equivalent to the post tax yield from a high interest savings account) which many commentators believe does not reflect the risk.

* Rent to Mortgages. Historically it has been more expensive to rent than to pay a mortgage, as fewer people could get credit than could rent and repairs and maintenance would be covered in rental payments. In recent years this has reversed, with interest only mortgages becoming more expensive in most areas compared to rents for similar properties.

History

British property prices were at an all time nominal high in the late 1980s due to the a prosperous economy, the increasing quality of housing through an increase in newly-build housing stock and newly leased right-to-buy council house.

Property prices fell by 30% through the early 1990s mainly due the worldwide recession. There was an increase in property repossessions by banks and building societies , and many people were left with negative equity for a number of years.

Prices started to recover in 1996, slowly at first and in some limited areas. By 2001 prices had in most places returned to their pre-collapse levels, and continued to rise, so much so that in 2004 many properties were "worth" double their market price only three years before. In many cases prices were increasing by 20% per year (1.5% per month).

The price rise has continued in many parts of the country, despite four interest rate rises, however prices seem to be dropping on highly priced properties and properties in London. Some analysts say that a price crash of 20% is possible in 2005 and many expect further "price falls of 30% to 40% from the peak over the next few years". A fall of 40% would take the average price of a house down from �165,000 to between �99,000 and a fall of 30% would take the average house to �115,500. Large falls could mean that many highly mortgaged households could find themselves in negative equity.