Are Housing Prices Really About to Increase Dramatically?

 In blog-newington

It would seem that springtime has come early for the housing market in the UK. According to a report issued by the Royal Institution of Chartered Surveyors, there has been an increase in house price expectations and enquiries by new buyers in January. Are housing prices really about to surge to notable levels again, though? There is a lot of debate about whether this is the case or not.

Before this turnaround, the housing market performed rather sluggish. While prices and activity in the housing market started to increase around 2013, it all drew to a halt in 2016, the year the country voted to leave Europe. There then followed a yearly decline in the inflation of house prices from a high of 8.8% in 2016 during spring, to a low of just 0.6% in October last year.

The prices of houses in London have increased much slower than even the national average over the last few years, which has been of benefit to buyers because it has made it more affordable. Interestingly, though, when you take a look at the bigger picture, over a longer period, housing prices have increased far more than earnings and general inflation. Halifax have recorded that housing prices are almost three times higher now than they were in 2000, whereas earnings have not even increased by 80%.

What is the Cause of this Recent Increase?

According to a working paper published by the Bank of England, it could be argued that lower rates of interest are the cause of the increase in house prices. It argues that a lower rate of discount increases the value of assets, which in turn increases the price of houses. It is the same principle that has helped increase equity prices in the past.

This curious relationship works two ways. According to the author behind the working paper, a consistent increase of long-term interest rates of 1% could cause housing prices to drop by 20%.

Another aspect to consider is the increase in demand for housing caused by longer lives and an increase in immigrants living in the country and more single-person households. Over the same period, we’ve already discussed, the number of households there are in England has increased by an incredible 13%. It’s interesting because according to the data released officially, the number of dwellings in the country appears to have increased faster than the number of actual households. Made all the more surprising considering the concerns for housing affordability and housing shortages.

Is That a Good Thing?

It is not quite as reassuring as it may look on paper, because there are some extreme housing shortages on a regional level which is exemplified by the extremely high rent charges in London. There is also a lot of debate about the quality of UK housing. An academic for LSE called Paul Preston noted on the ageing state of housing in the UK that it was similar to Cuban cars, in that it was still in use but polluting and clapped out.

Not All Good News

While the sentiment is that the housing market is experiencing an upturn, the reason for the upturn, those tailwinds that caused it is starting to weaken. Interest rates can’t be reduced much further and as post-Brexit Britain tightens its laws on immigration, there will be fewer people coming to the country to buy. It seems as if, despite the positives we’ve seen occurring over the last few years, those double-digit housing price inflation figures that were expected before the financial crisis feels like a distant part of history.

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