Is The UK Housing Market Set To Fall?

House prices recorded another strong year in 2007, underpinned by significant economic momentum, ongoing housing shortages and strong buy-to-let demand. A worldwide economic boom allowed London to benefit from its position as one of the globe's financial hearts, while the manufacturing sector shook off the strong pound and the cost of expensive raw materials to record a reasonably strong year.

The upbeat economy proved supportive of buyer confidence and proved to be a great factor in keeping housing demand at high levels, especially during the first six months of the year. However, the Department of Communities and Local Government (DCLG) said that price inflation fell slightly late last year, from 11.3 per cent in October to 9.5 per cent in November.

Although the figures are not very positive, most analysts had predicted a downturn in price growth as a result of the global credit crunch. The Royal Institution of Chartered Surveyors (Rics) has backed the view and said that the UK housing market is supported by a number of key underlying factors.

The resilience of the employment picture continues to provide a key layer of support for the market. In the absence of a marked increase in redundancies, the level of distress sales of property should remain relatively subdued.

The likelihood of further interest rate cuts during the first half of the year will also help underpin house prices as first-time buyers are attracted back to the market.

However, mortgag and remortgage lenders, brokers, estate agents and valuers say that property prices will slow dramatically in 2008, in some regions they may even fall, although, they are not predicting a crash in the residential or buy-to-let markets.

The main reasons for the more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity.

So what does 2008 hold for investors? Higher mortgage and remortgage rates and lower house prices were two major financial features of 2007, but what will the future hold?

Some experts are predicting average house prices to fall by 2 per cent in 2008 and while buyers are much thinner on the ground, so are sellers. Many sellers are not prepared to sell at less than they think their property was worth earlier in the year and fewer houses on the market will keep prices from falling very far. However, demand for properties will fall because buyers will be hit by higher borrowing costs and tighter lending criteria. In particular, some existing sub-prime borrowers will be unable to remortgage, or afford the rate their mortgage reverts to when the initial deal finishes, and they will have to sell or their properties will be repossessed.

The was a steady easing in house price growth during the second half of 2007 as the rise in interest rates since August 2006 and negative real earnings growth have curbed housing demand.

The impact of higher interest rates will bite further in the coming months. In particular, this will arise as large numbers of borrowers who took out fixed rate mortgages in 2005 and 2006 at very low rates move on to significantly higher rates as their mortgage term expires.

Higher commodity costs including food, energy prices and council tax bills will also take up more of homeowners' income, reducing the amount many householders have to spend on housing. As a result, the annual rate of house-price inflation will continue to ease during 2008.

On the upside, we expect the Monetary Policy Committee to cut rates to 5 per cent by the end of 2008 and this, along with the continued shortage of housing, will provide some support. House price growth is expected to be broadly flat in 2008. With little if any growth in prices, and lower levels of house purchase activity, mortgage lending will also be weaker in 2008.

Keywords: