Why house prices will continue to rise

Why house prices will continue to rise

The recent headlines about the increase in house prices have provoked comment and debate from both “Bulls” and “Bears”.

Bulls argue that the “house price crash” has bottomed out. Allied with indications that the economy is improving and increased lending by the Banks, the property market is set to take off.

Bears retort that government initiatives have created a blip and that properties are still over-valued based on historic measures such as the house prices to earnings ratio.

In fact it is this last statement that they use most often to justify why prices can’t rise.

But there’s no rule that says that house prices should stay in line with an historic average!

Things are very different now (when the ratio is 5.1) from 25 years ago (when it was 3.9). For example, Baby boomers – who are the luckiest generation ever when it comes to accumulating wealth – have seen a massive increase in the value of their own property over the last 25 years. Most of those who haven’t already paid off their own mortgage are benefitting from the lowest interest rates ever.

Their cash is filtering its way down to their offspring who are using it as deposits to get on the property ladder. Very often this equates to a deposit of 20% or more. Which makes the amount they need to borrow on a mortgage (and so the repayments) lower than when most loans were for 95% or more of the property value.

Along with these large “free deposits”, mortgage rates are lower than they have been in living memory, making repayments more affordable.

Additionally no-one seems to ask where all the frustrated wannabee first time buyers are? Unable to get on the housing ladder over the last 5 years, have they given up on the idea of buying and settled with renting for the rest of their lives? Or are they “stacking up” waiting for the time that they can save/receive/inherit the amount needed for a deposit and qualify for a mortgage?

Then of course there’s the cost of buying versus the cost of renting comparison. With rents increasing, in many parts of the UK the monthly cost of buying is lower than the cost of renting – and with the option of locking in to a long term fixed rate deal. I haven’t heard of too many landlords agreeing to fixed rents of 5 or 10 years!

Finally, property ownership is, quite simply, a British tradition. People like the idea of owning a house or flat and will make sacrifices to do so. They know that it’s very likely that property prices will do what they always have done, and rise above the level of inflation. Quite simply it’s the one thing they can do that both gives them pleasure and increases their wealth over their lifetime.

So forget the house prices to earnings ratio. If people can get a deposit, qualify for a mortgage, and afford the repayments, they will get on the housing ladder. Add a bit of good sentiment about the economy and rising property values, and they’ll want to buy before prices rise any higher.

Add a buoyant Buy to Let sector to these first time buyers and the market takes off. Expect to see estimates of house price inflation get revised upwards a lot over the next few months!

Related posts:

How to get a bargain when you buy
First Time Buyers – Will There Ever Be A Better Time To Buy A House?
Help to Buy - The 10 Questions You Need To Ask

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