House Price Crash Looming

November 21st, 2007

It is beginning to look more and more likely that a house price crash is looming here in the UK and it would seem that the culprit, surprisingly, is not the US sub-prime market. Admittedly the US has played its part but the culprit here is the legion of people in the UK buying to let. Or more specifically the people who have been ramping up the property market but have now suddenly stopped buying-to-let.

Demand has been killed off by the interest rate rises of the Bank of England that since 2003 have gradually (and since 2006 rapidly) increased the cost of borrowing. Now ‘it simply is not worth subsidising your tenant in the vain hope of capital gains after thirteen years of incredible rises.’ Put another way, the overvaluation in the market has become so obvious that people are no longer willing to ignore it but are waiting for the market to correct itself.

It is a simple economic maxim that when demand falls so will prices, especially if those prices have been artificially inflated by rampant speculation. The higher they have been the further they have to fall and according to The Economist, ‘the global housing bubble has been the biggest asset bubble in history’.

Oh dear.

The effect of this house price crash will vary from region to region. In Northern Ireland house prices rose 400% in about twelve years which puts them in line for the largest fall, although London will also suffer. The City, usually London’s life raft in times of minor economic difficulty is having its own serious problems. Those same buy-to-letters who just a year ago were optimistically buying are now returning to the market hoping to offload what could soon turn into millstones around their necks. Increasing supply in the market forces prices even lower and so the cycle goes on.

In 1997 Gordon Brown, as Chancellor of the Exchequer, promised an end to the times of boom and bust. It seems he may have been promoted just in time to eat his words.

This entry was posted on Wednesday, November 21st, 2007 at 2:21 pm and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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