Why house prices don’t always rise!

June 18, 2010

There was a time not that long ago when it seemed you couldn’t lose by investing in the UK property market.
Things have now changed, when the recession left millions of people’s dreams of capital appreciation in tatters, with many more struggling with the horrors of negative equity.
But why do house prices rise and fall as they do?

* The property market, like all capitalist markets the world over, is driven first and foremost by demand and supply.

* If there are six similar properties for sale on the same street, it stands to reason that a buyer choosing between them will have more chance of getting a good deal than someone else buying in an area where there are six buyers to every seller.

* Just like stocks and shares, the value of a property is also driven by sentiment, or in other words what people think it is – or will be – worth.

* A major factor is the availability of cash, or in most cases mortgage finance, to fund purchases – and this is what suddenly dried up when the credit crunch hit in summer 2007.

Then came the crash, knocking thousands of pounds off the value of the average property and leaving many of those who had bought at the top of the market stuck with homes worth much less than they had paid.

The consequences of this on the mortgage market are still clear to see today, with the top mortgage deals still coming with deposit requirements of 35% or 40% – a lot different from the 125% mortgages being offered just a few years ago.

This continued reluctance to lend, along with the ensuing recession that forced some homeowners to put properties on the market at rock-bottom prices, has kept the market subdued ever since.

Past figures show that at one point a home somewhere in the UK was being repossessed every 10 minutes.

So the market was being flooded with cheap properties at a time when buyers were scarce, due to both a lack of confidence in the housing market and economy as a whole, and a general lack of cash or mortgage finance.

Little wonder then that Nationwide’s House Price index for May 2010 revealed that even after many months of modest gains, prices remained 10% below the level they reached at the peak of the market in 2007.

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