In the UK property prices have seen phenomenal growth in recent years, largely due to a sustained period of low interest rates, which enables homebuyers to borrow more, low unemployment and robust earnings growth. But bubbling below the financial credentials of a buoyant economy is a wealth of social and demographic factors, which are also providing significant support for house prices. This article explores these actors and attempts to predict whether these factors will have a continued affect on property prices in the years to come.
The 'Social' Economy behind Property Prices
Economists say the rise in the number of households due to an ageing population, high levels of immigration, growing numbers of separations and a inclination to delay settling down is driving up demand which in turn is pushing up prices.
These factors are compounded by the fact that the supply of new households is nowhere near matching the growth in demand. Also, the rise of buy-to-let, the increase in people owning second homes and fewer people moving, which is further limiting supply, is also helping to shore up prices.
Several firms of top accountants point out that by looking at past models of house price trends the current market looks overvalued by around 25 per cent. But several macroeconomics specialists say that once other factors have been taken into account such as immigration, disparity between supply and demand and the availability of affordable credit then property values look a lot more realistic.
According to the Office of National Statistics the population in the UK is growing at a rate of around 500 people per day or well over 150,000 per year. Some economists point out that the flood of immigration particularly from the Eastern European Countries, who have recently joined the EU, will continue to fuel property price rises for years to come.
A more subtle but also significant driver of house prices is the rapid growth in the number of households. Since 1996 the number of households in Britain has risen by almost 2m since 1996. This growth is forecast to accelerate over the next 10 years, with the number of households expected to reach around 27.5m by 2016, compared with 25m today. This rate of growth has led many people to believe that the rise in the actual number of households means that demand for housing will still be on the rise irrespective of the state of the underlying economy and that if the shortfall in properties is not met the decrease in available properties will become ever wider.
The government has a target of 200,000 new properties each year, but it is difficult to establish if this figure allowed for the sudden influx of people from Eastern Europe. The house-building sector is currently building around 140,000 each year and some housing technical experts estimate that the number of new households is group at around 50,000 each year.
Another main issue is the rise of the buy-to-let landlord. Buyers looking for investment properties are typically looking for similar properties to first-time buyers, which has meant that over the past few years this section of the market has been awash with money. Because of planning restrictions in popular areas, developers have been building more flats than houses. These new build flats are sometimes snapped up by Buy-to-let investors before they even come on the market. As there are now some very large players in this market they sometimes have agreements with builders and as they often buy in bulk they can negotiate discounts.
But as developers are generally loath to bring prices down, they may offer incentives such as cash back on completion and free furnishings. This over-inflates the property's price in the market and helps to push up prices of similar properties.
As Land Registry figures reveal there is a growing trend in people willing to move house. The volume of property coming on to the market has halved over the past six months compared with last year and 2004. Last year, turnover in the housing market equated to just 5.5 per cent of stock, the equivalent of households moving only once every 18 years, but in the 1980s this figure was nearer to 10%.
The reasons for the decreases in house moves as been put down to the value of debt eroding in a low inflation economy. Also, higher transaction costs such as stamp duty, are acting as a disincentive for homeowners to move. More people, particularly in properties worth more than £250,000 and £500,000 where stamp duty on purchases rises to 3 per cent and 4 per cent respectively, are choosing to refurbish or extend existing properties rather than move.
This also has a knock on effect on the reduction in people moving up the housing chain and coupled with buy-to-let investors snapping up properties at the lower end of the market this has greatly reduced the number of properties availably for those taking the first step onto the housing ladder.
It is difficult to predict the future. Attempts by the government, via the Bank of England, have been to try and cool the housing market by increasing interest rates. This is more likely to have an effect on cooling the underlying economy with people having less money to spend rather than have a knock on effect on housing prices. In time honoured tradition the forces of supply and demand come into play and until the demand is met by building more houses the social factors are, at least for the short to medium time frame, always going to overrule a massage of interest rates.
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The Author has had a wide and varied career in Information Technology and Finance. He is currently helping to establish the internet based secured loans provider We Introduce You.
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