The Housing Market refers to the supply and demand for houses, usually in a particular country or region. A key element of the housing market is the average house prices and trend in house prices.(see: History of House prices)

The Housing Market includes the following features

• Supply of housing - quantity of housing strock
• Demand for housing
• House prices
• Rented sector. Buy to let investment and demand from tenants
• Government intervention in the Housing market

Factors which affect the Housing Market

• Interest rates - which influence cost of variable mortgages
• State of mortgage industry, determines whether people are eligible for mortgages
• Economic growth, incomes and unemployment rates
• Population and demographic trends

Features of UK Housing Market

• The UK Housing Market is often volatile because of various factors. See: why the Housing market is volatile.
• The UK Housing market has an influence over wider economy. e.g. when house prices are falling, consumer spending tends to decrease.
• Because the housing market influences the economy and individual homeowners, it is important to try and be able to predict future movements in the housing market

The credit crunch shows no sign of abating as Banks such as Barclays continue to post dissappointing results.

With the UK economy forecast to slowdown and unemployment rise, there could be a rise in mortgage repossessions and more bad loans for banks to write off.

A look back at the last 12 months of the credit crisis.

With House prices falling and the number of transactions dropping very fast, pressure is building on the government to introduce policies to help the beleagured market. Strategies include:

• Freezing stamp duty. Home buyers would only pay the stamp duty after a delay of several years or when they sell the house.
• Income support for those paying mortgage interest payments and who are made unemployment.
• Tax free fund to help first time buyers raise a deposit to buy a house.
• Extending scheme for Bank of England to offer security on new mortgage loans.

Economists warn that the government need to make firm decisions soon. If there is uncertainty about future discounts on stamp duty, it will persuade people to delay buying a house now as they could save £5,000 or more in stamp duty.

It is difficult to predict interest rates. The bank of England are being pulled in two separate directions.

Firstly, there is the real threat of an impending recession, due to:

• Declining house prices
• Rising costs of fuel and energy reducing living standards
• lower consumer confidence
• Natural end of business cycle

With unemployment rising and growth slowing, normally, the Bank of England would be cutting interest rates to boost spending. However, these are not normal times. The lower growth is occuring simultaneoulsy with rising inflation. For many years, the UK inflation rate has been close to the government’s target of CPI 2%. Recently it has pushed up closer to 4%. The RPI is even higher. With gas and oil prices forecast to rise some fear inflationary pressure will continue to build leading to wage push inflation (already unions are out on strike)

Therefore, this puts pressure on the Bank to increase interest rates. Given difficult choices, the Bank will probably keep interest rates the same and see how the economy develops. They are probably praying for a halt in the inexorable rise in oil prices. This would reduce inflationary pressure; also a recession would reduce demand pull inflation and enable lower interest rates.

• Interest rates explained

Defaults on mortgages in the UK are still relatively low. The number of mortgages in arrears by more than 3 months is 1.1%  or 129,000 out of 11,000,000 mortgages. In 1995 (when statistics started), the % with arrears was 3.82%. This was due to the   higher interest rates in the early 1990s

However, the number defaulting is expected to rise this year. Rising living costs such as food and energy prices are squeesing disposable income at a time of wage restraint. Unemployment is also rising at the fastest rate since 1992, the number on claimant count benefits has increased to over 1 million.

With the prospect of recession, the bank of England is reluctant to increase interest rates. However, with inflation forecast to rise to 5% there is also no room for cutting interest rates.

Council of Mortgage Lenders statistics

Bad news for homeowners continues

In the short term, various measures are needed to stabilise the UK housing market.

The most important criteria is regaining a sense of normalcy to mortgage markets. Due to credit crunch and fall in confidence, banks and mortgage lenders are becoming unwilling to lend mortgages unless backed by large deposits. It means that many would be homeowners simply can’t get a mortgage.

A few months ago the Bank of England offered to inject £50billion to secure mortgage collateral. However, it appears this has failed to help. It may be necessary for the Bank of England to secure mortgages for first time buyers - a sector of the market particularly hard hit by the move.

It is the lack of mortgage finance that is proving the biggest downward factor on house prices. There is a danger than paralysis in the mortgage sector could cause house prices to undershoot creating more instability in the housing market.

The other problem is declining living standards and the prospect of recession, there is less that the government can do about that.

Mortgage lending in the UK has slumped by 32% since this time last year. This has contributed to significant falls in house prics. House prices have now fallen by £17,000 since the start of the year. This represents almost a £100 decline in house prices per day during 2008.

It is estimated that the average house price  worth £187,500, will drop by  12.8 per cent, this year. However, the % fall is likely to be bigger for houses worth more than £200,000.

Falling House prices are a reaction to:

• Shortage of mortgage funds
• Falling demand due to economic slowdown and rising living costs
• Overvalued house in the 2000 boom
• Lack of confidence in the housing market
• Expectations of house price drops encouraging people to save and rent in short term.

With prices falling, many may be looking for ways to make a quick sale. These are some tips for Selling House in a declining Market, quickly without losing money unnecessarily.

1. Get Price Right

Getting the price right is the most difficult aspect of selling a house. One strategy to try is to put the house on the market at the lower end of expectations. This will create interest and get people to view the house. Hopefully, this will attract bids, possibly more than the offer price. If the house is overvalued, you will struggle to get any interest and viewers; with less interest, you will get less offers and the offers you do get will probably be a big discount to asking price anyway. If you have a beautiful house, get people to come and be inspired by it.

2. Keep upto date on house price trends.

Unfortunately house prices are quite volatile. If house prices are falling, you have to be adaptable and reduce your asking price, otherwise your initial price will be outdated.

3. Create Best Impression.

First impressions do count. If you get people coming to view, spare no effort to give them the best first impression. This can include:

• Keep house tidy and free of clutter.
• Clean Windows to ensure maximum light.
• Make sure the house is well lit, consider daylight bulbs if selling in winter. Light has a powerful influence over people’s perceptions.
• Remove controversial posters / pictures. You may love to see Britney Spears semi naked, but, it will not impress an old conservative lady.

4. Bathrooms and Kitchens are very important

Bathrooms and kitchens are the best place to spend money and increase the value of the house. Get the best kitchen gadgets like attractive kettles and toasters. Make sure the bathroom is glittering and well polished.

5. Entrance should be Inviting

Make sure entrance / garden is tidy and well maintained

6. Repainting is worth the Effort.

Generally most welcoming colours are light pastel shades. Darker stronger colours create a love or hate effect. It is best to appeal to widest audience.

7. Spare Room Into Bedroom

If you have a spare room used as storage; it is worth converting it into a small bedroom to show off its potential. If it is full of clutter have this removed, even if you have to pay storage firms.

Looking at the historical data for UK house prices, we can see how volatile UK house prices have been.

When forecasting house prices and the future of the housing market, there are several things to consider:

• Number of new houses built
• Number of houses unoccupied / unsold
• Number of households. This depends on both population growth and demographic factors such as number of single people.
• House prices to earnings ratios. A feature of the past few years has been a rise in house price to earnings ratios. In other words house prices have been rising faster than average wages meaning that they became increasingly unaffordable. The downturn in prices is partly a reflection of this. Using house price to earnings ratios, there is still probability of significant falls in house prices in future months. Keep reading →

The early 2000s saw a worldwide boom in house prices. In many countries, house prices increased faster than average incomes. In many countries, house price to incomes ratios reached an all time. For this reason, many feel that house prices are badly overvalued and therefore, it is only to expected that there is going to be a severe house price correction.

The future of house prices depends on many factors such as:

• Supply. If there is a chronic shortage of housing then house price to incomes ratios can rise. For example, the UK has very low levels of new housing being built. Therefore, they are less vulnerable to a long term collapse in house prices. There is still a fundamental disequilibrium between rising demand and restricted supply. However, in countries like Spain and US, there is a much greater excess of supply. For example, in 2006, Spain saw the supply of houses built reach over 800,000. The US, also has many homes unsold. Therefore, it will take a lot longer for house prices to recover in these countries. Keep reading →