Recent boom in prices

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Why have house prices gone up so much?

This is a very good question and indeed it needs answering before you can be in a position to judge for yourself whether or not there will be a house price crash.

There are basically 2 underlying factors which are responsible for the huge rise in house prices and these are the low cost of borrowing and low unemployment. There are indeed many other factors which we will look at later on this page but these are by far the most influential. We will now look at these 2 factors in detail:

Low Cost of Borrowing

  • Interest rates were at a 48 year low. It's cheap to borrow which is adding fuel to the house price fire.
  • The down side to this is that while the monthly repayments may seem low now at todays rate it is all too easy for people to over-stretch themselves which could quickly result in difficulties with just a 2% or 3% rise in interest rates. See the paragraph on "The huge increase in personal debt" below.

Unemployment

  • UK unemployment is now at its lowest level since the mid-1970s. More people with jobs means more people buying houses. However, if interest rates were to rise unemployment may fall as companies will have less money to invest.

Government Spending

  • Under new Labour the amount of money spent on items such as doctors, nurses and teachers pay has increased above the rate of inflation. While this may not be a bad thing, it none the less gives these public sector workers increased spending power which they can then use to bid up house prices.

Two Incomes

  • Now both the wife and husband tend to work so they can arrange for a joint mortgage. This means that they can in effect bid up the house prices.

People are living longer

Advances in medical science healthier lifestyles mean that life expectancy is increasing. The average life expectancy for men is 73 and for women it is 79. This leads to added population pressure.

There are more divorces than ever before

A third of marriages now end in divorce, a figure that keeps on rising. The end result is that there are more single people living alone.

This means that more households are created, although the households tend to have a lower income and less need for space.

Speculation

People see house prices going up and think that they are are good investment for say a pension.


When you think about the above major factors I think you can see just why the housing boom has occurred. It may also make you think as to what is going to happen in the future. Lowest interest rates for 48 years and lowest unemployment since the mid-1970's. Could it be a possibility that these factors might change? As I mentioned earlier, these are the 2 major factors. Now let us look at the other contributing factors, the first of which I was solely tempted to list above but in the end I came to the conclusion that it is not a fundamental factor even though it is a large contributing factor.

Other factors which have contributed to the 'Housing Boom'

The Buy to Let market

  • Let's start by asking a question. How many people do you know that rent out property? And secondly, how many properties on average would you say these people each have in their portfolio?
  • I'm not claiming to be a mind reader but I would say that the answer to both would be 'quite a few'. Traditionally landlords were wealthy people who investment in property. Nowadays everyone's is doing it. But why? The answer is simple, in a rising house price market using a high level of gearing people can easily build up a housing empire. This must be the most common topic of conversation in every pub up and down the country and everyone is more than willing to tell their own story.
  • Think of a pyramid and you'll begin to see the way that it works. A person re-mortgages their existing property to fund a buy to let mortgage on 1 or maybe 2 properties.
  • These properties are then rented out either privately or to councils. Once the landlord has saved enough rental income to put down a deposit on another property they go out and buy another house. In a rising market this can happen even quicker as equity can be withdrawn from the newly acquired rental properties to fund new purchases. Using a high level of gearing it has been possible for literally tens of thousands of people to become landlords.
  • What has this got to do with the house prices going up? The buy to let market is pushing up demand and mopping up the limited supply which ultimately leads to spiral. This then turns into a vicious circle as first time buyers are priced out of the market and are forced to live in rented accommodation which is in turn owned by the buy to let landlords.

The 'right-to-buy' of Council Houses

  • We have good old Maggie to thank for this one and it is also related to the Buy to Let market which you will see in a moment.
  • Following the Conservative win in the 1979 election, Margaret Thatcher introduced the “right-to-buy” policy under the Housing Act of 1980. 'Everyone should own their own home'.....and why not? Well let us start by looking at how council houses came about in the first place.
  • We have to go back to the end of WWII at a time when Britain was left counting the cost of the war with nearly one in three houses destroyed or damaged. The majority of Britons before the war lived in cramped 2up 2 down houses with a small back yard and a toilet to the rear of the property. There were not many home comforts for the working classes who made up the vast majority of the population. This led to a major boom in the building of council houses. Council housing was generally typified by houses with generously sized rooms, however they also tended to be unimaginatively designed, and rigid council rules often forbade tenants "personalising" their houses.
  • This situation of council housing for the 'worker' worked reasonably up until 1979. From here onwards it was a slippery slope which is partly to blame for the recent housing boom. The council houses were sold off in their droves and for a discount to market value as an extra incentive for people to take up their right to buy. The thing which seems to have escaped Margaret Thatcher is that council housing was specifically designed for those low income members of society who were unable to buy or rent in the private sector.
  • We are now left with a situation where there is not enough council property to house those that should be in council property. These people are now being housed in privately rented accommodation which is paid for by the government. This property is leased to the government by the Buy to Let landlords.
  • You should by now begin to see a pattern emerging. This pattern is the viscous circle pattern.

The huge increase in personal debt

  • We are all living beyond our means. In the old days if you didn't have it then you couldn't spend it. Nowadays we are all bombarded with overdrafts, credit cards and personal loans. In addition, you can have a mortgage of as much as six times your income to purchase a house were as in the old days it was typically 2/3times. As much as we'd like to say that we are all sensible with money it's just not that easy and we end up succumbing to these tempting offers.
  • As a nation, every man, woman and child in Britain owes on average £2,300 and this figure is continuing to rise at a worrying rate. What is even more worrying is that the amount Britain owes per working person is significantly higher the £2,300.
  • Debt used to be a dirty word but now it is common place and often wrongly reffered to as "investing". With rising house prices, people are now having to take out huge mortgages but it doesn't seem to worry anyone anymore. We need to go back to treating debt as something to be scared of. This will happen if we suffer a house price crash. Once bitten twice shy.

The rise in popularity of equity release

  • More homeowners than ever before are withdrawing equity from their properties. Low interest rates mean that sums such as £50,000 or even £100,000 seem to be affordable when looking at monthly repayments . However, debt is still debt. The fact that debt is 'cheap' in todays terms doesn't mean that it's always going to remain so.
  • Much of this money is being spent on holidays, new cars, and house improvements. This has a knock on effect within the economy as more money is being spent, keeping more people employed and bringing in more taxes for the government and ultimately increasing the demand for houses and at the same time because this factor is also pushing up prices it is also decreasing the supply of houses.
  • This leads some people to doubt the strength of the economy, as it is so dependent on debt rather than increased productivity or savings.


See also

House prices