Where will house prices go from here, as we are thinking of buying a property for the first time?
It's an interesting one. Before I answer that, can I just point out of course that a house is a home. Whether or not it rises or falls is of little importance as long as you can, and do intend to stay there.
Inflation will slowly erode away the significance of your mortgage payment whilst rent will continue to rise with inflation. That is the positive side to it, and that's where the positivity ends.
If you were to ask me to bet if house prices were going to be cheaper in two years than they are today I would find it difficult to find any reasonable argument to confirm otherwise.
There are many economic reasons that simply batter house prices but only an upturn in sentiment will distract the market away from the blindingly obvious point that house prices are simply far too expensive. A further 10% fall is not unreasonable.
Let's look at some of the key factors that will influence house prices:
Supply and demand are the two key drivers. Firstly we all know that we had 300,000 empty properties in 2009 in England alone, let alone Wales, Northern Ireland and Scotland(1). I can't accept any argument that we have an undersupply issue or that this will have any positive impact on house prices.
As for demand, consider this onslaught:
First time buyers are being asked to put a staggering 10% deposit down for their property which all but makes it impossible to buy a home. There are a scattering of schemes around that allow a 5% deposit if the parents are prepared to put up extra security, but either way the market is very tight indeed.
If you had purchased a house in November 2007 (average price Â£183,441), it is highly likely you will be in negative equity today as the average house price sits over 9% lower at Â£166,798(2).
Those people will find it difficult to move house or even move their mortgage, as lenders have tightened their criteria to protect themselves and are asking for bigger deposits. They have also altered their criteria to charge those with less equity than others.
And so when borrowers come to remortgage they are held hostage by the same banks we have bailed out and pay through the nose for the bank's previous bad habits. Nice touch. I have always been told that the government would force these banks to lend, a story I have long since left behind with that cracker, the tooth fairy.
Banks have simply been allowed to capitalise on the back of very low interest rates, whilst charging excessive margins and then recapitalising their reserves just in time for the government to tax them on their profits. And so we have simply paid another stealth tax. I am bored.
So we know fewer people can borrow or move. As a consequence mortgage approvals are down as low as the housing trough in 2007 at only 45,000 and sentiment is going south(3).
All of this I will remind you, is pre the inevitable rising unemployment and at a time of record low interest rates. Rates will stay low for the next 18 months, I am confident of that as there doesn't and really cannot be any real or sustained inflation, and that will provide some support to the market.
However the government is soon to announce large cuts. That will mean rising unemployment, a tightening of spending by everyone, which will send more industry to the wall, and of course this means fewer people will be able to buy.
Furthermore the FSA have proposed new tightening of lending (bit like putting insect repellent on after you have malaria) in their mortgage market review. They have clearly stated in page 37 that they expect house prices to fall as a consequences of fewer people being able to borrow(4).
I cannot see how house prices in two years will not be cheaper than today.
If you would like a free mortgage review call Peter on 0845 230 9876
Your home may be repossessed if you do not keep up repayments on your mortgage
(2) Land Registry
(4) Daily Mail
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'