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Guest_James Toney_*

Nice Article, Read It All

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good article , although did not think so at first,

liked the bit at the end

So don't panic. Let me leave you with a quote: "House prices in Britain rose last month, confirming that the slump in the south of England has levelled out." That was from The Times, in October 1990, a mere four years or so before the bottom was actually in

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Where to next for house prices?

John Stepek

July 17 2009

The house price crash is over. Still sitting on the sidelines, waiting to buy a property? Forget it. You're too late. The market's taken off already. In this game, if you're not fast, you're last. All the real bargains are gone now.

Sure, there was a little blip back there, a little scare. Those stupid banks mucking about, refusing to lend money. But then, maybe it's just what the market needed. A correction to knock a bit of froth off prices and to give sophisticated investors a chance to get in at the bottom.

You shouldn't believe what all those doom-mongers are saying. The recession's near enough over. A few more people might lose their jobs, but that'll be more than offset by all the pent-up demand built up over the last few months of mortgage drought.

Britain is a small country and it's not getting any bigger. It's your basic rules of supply and demand - there aren't enough houses to go around. Stands to reason that they're going to just keep going up in price.

Like I always say: you can't go wrong with bricks and mortar.

How you can get on the property ladder

And now, a return to our normal service

It might be an exaggeration (though I think I'm being restrained, if anything), but the above few paragraphs are indicative of the "back in business" vibe I'm getting from some of the property bulls in recent months.

And who can blame them? Housing market data has turned from being absolutely disastrous 12 months ago to being much more stable in the past few months.

Both Nationwide and Halifax have seen regular monthly price rises this year. And the Royal Institution of Chartered Surveyors (Rics) reported a real turnaround in its members' attitudes last month: more surveyors now reckon prices are going to rise than expect further falls. That was the most upbeat outlook since May 2007.

But if you're a despairing would-be first-time buyer, numbly wondering whether prices will ever fall to some level remotely resembling three or even four times your salary, don't worry.

This "rally" isn't going to last. Sure, the property pundits will declare there's light at the end of the tunnel, just as they did all the way through the 1990s downturn. But the bottom for house prices is nowhere near yet.

Find the cheapest mortgage for you

So why is the market rallying just now?

A lot of it is down to interest rates. Banks may still be reluctant to lend, but low interest rates have helped existing homeowners in a number of ways.

No one wants to sell when house prices are falling. And some simply can't because they're in negative equity. Low rates reduce mortgage payments, meaning that people who would once have been forced out as soon as unemployment hit, for example, have been given some breathing space.

Moreover, it's also given rise to the "reluctant landlord" phenomenon, whereby sellers who simply can't bear to part with their home for less than the peak price of spring 2007, just keep it on and rent it, while moving to their new house. With low rates, they don't need to get that much rent to be able to cover the mortgage.

In other words, low interest rates have enabled everyone except the most motivated sellers to just sit on their homes.

And at the same time, low rates mean anyone who sold out of the property market before the crash is now seeing almost no return on their money.

The "sold-to-rent" brigade have, in the past, been able to use the interest they received on their cash to pay their rent. That won't be possible now.

With their capital being eroded and prices off peak levels, I suspect your average sell-to-renter is now feeling quite keen to get back into the market.

So you've got a combination of restricted supply and an unusual number of "forced" buyers, people who feel pushed into the market by low interest rates.

That gives you all the ingredients for a bounce - certainly in wealthy, high-density areas such as London and the south-east.

Learn more about properties in your area

This is unsustainable

The only trouble is, this can't last. For most people, nothing has changed about the property market. Mortgages are still hard to come by. House prices are still, by historical measures, massively overpriced.

And this is at a point where interest rates have fallen as far as they can go. In fact, in the mortgage market, they're already picking up.

Banks these days are competing with each other for savings, not mortgage business. But as they push up the rates they offer to attract savers (you can now get 5% as long as you are prepared to lock up your money), so they have to charge more for home loans.

Of course, banks are also charging more for mortgages because they've woken up to just how risky they are. If you want a bank to lend you money against an asset that is falling in value, then they're going to charge you a rate that reflects the risk involved in that.

And banks also realise that they're going to see more bad debts in the future. So they are building up capital in readiness. They're not going back to the days of easy lending any time soon.

One reason bad debts will keep rising is because unemployment is going to keep ticking up. That will inevitably lead to more forced sellers, regardless of how low your mortgage rate is, you can only survive without a regular income for so long.

So whatever "recovery" we're seeing now is a blip. I'm not the only one who thinks so, accountancy giant PricewaterhouseCoopers reckons prices will fall again next year and be flat in 2011.

By 2015, prices adjusted for inflation could still be below 2008 levels. There's a 30% chance that this will still be the case by 2020. That's not as ridiculous as it might seem, people who bought in 1989 were still waiting for (inflation-adjusted) prices to return to those levels 10 years later.

So don't panic. Let me leave you with a quote: "House prices in Britain rose last month, confirming that the slump in the south of England has levelled out." That was from The Times, in October 1990, a mere four years or so before the bottom was actually in.

Edited by Selling up

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