The housing market still defies gravity. Despite rising inflation, rising taxes (for some), job insecurity and a general cautiousness about the UK's future economic position property prices refuse to do the decent thing by falling in sympathy.

In fact last month saw the Halifax, Nationwide and Rightmove indices all tick slightly upwards. And Rightmove reported that the average time on the market had fallen from 98 days to 89 days.

But why should house prices move down? After all, each seller has their minimum sale price and, unless forced, can simply keep their house on the market for as long as it takes. Sellers and estate agents are also it seems quite happy to keep asking about 40% more than the average sales price for a house (see Optimism Index graph below – comparison of Rightmove asking prices to average sales prices seen by Halifax and Nationwide).

What has really kept the market afloat is the lack of forced sellers.

Much has been said about supply and demand in the market place. So that the more sellers there are the lower prices will fall goes the mantra.

Optimism index

Optimism index

But that is only half the story.

Consider a retailer who buys stock to resell. If he doesn't get the price he wants then the stock will just sit there unused tying up capital and space. If it remains unsold, then at some stage the retailer will have to decide to drop the prices (especially if it is a spoilable item). Then consider a competitor moving in next door, the retailer would have to readdress his pricing. The reason is that, unless the retailer is selling for a hobby and can afford to sell nothing and waste capital tied up in the business (or just sell up and retire), he is a forced seller of goods. He has to sell to make a living, or at least to recoup some losses.

HPI Mar2011

HPIs – March 2011

Home-owners are not in this position. If the house remains unsold then they can continue to live in it, the house remains a useful thing to have. If the house they own is empty then they can rent it out (the rental market is strong at the moment and is projected to be for the foreseeable future).

So, unless the owner has to sell at any cost, houses will remain unsold if the seller's price is not met.

Another part of this equation to consider is the estate agent. Many people lay the blame for high prices at their door. However, estate agents only get paid on completion of a sale. Prior to that it's just an outflow of advertising money, wages and costs. Sure they are likely to talk the market up to get your house on a sole agency basis, but once in their sticky mitts the owner will be bombarded with requests to drop the price. I would bet that estate agents, conveyancers, mortgage brokers and financial advisers would be quite happy for a quick price reset so they can get back to volume sales. That's where the money is.

Then there's the banks, they've learned their lessons (?) and are now no longer pumping money into the market without thought. Look at the tight lending and deposit requirements. So no-one could say they were the foundations of continuing high prices.

So what or who is holding house prices up then? The people that really matter of course, the owners.

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