Why UK House prices continue to rise !

By: Nadeem_Walayat

For how many years have the market commentators been predicting a UK housing crash ? 1 year, 2 years, 5 years ? Yes in some cases even 5 years ago market pundits have been calling a crash, but in the meantime house prices, to this very day continue to rise ever higher !

Why ?

Here are four reasons as to why house prices in the UK continue to rise

1. Average Earnings / House prices & Interest Rates
Traditionally, average earnings and house prices have been taken together to produce an affordability ratio, this ratio has clearly in recent years shown itself to be flawed ! Fundamentally flawed. In that the ratio ignored historically low interest rates as a function of earnings and house prices. A more accurate indicator would need to include interest rates, and therefore MarketOracle has constructed a new house price to earnings ratio which includes interest rates.

The indicator accurately shows why house prices have continued to rise, as they are no where near the un affordability of the early 1990's, off course the index could be extended to include other variables, such as the level of new build construction, growth in households, employment levels etc. So as to fine-tune the trend. But basically in a simple 3 variable chart the MarketOracle House price ratio is able to explain that house prices ARE still affordable and thus the primary reason why they continue to increase.

The chart shows why 2001 was a great time to buy as world interest rates plummet, whilst IN 2001 there were countless economists suggesting that UK house prices were over valued and expensive ! When infract they were at their most affordable level in a generation, and sparked a surge in house price growth.

Presently house prices are at the upper end of the range, which does suggest slower house price growth in the forseable future unless interest rates fall.

An interest rate rise to say 5.25% would put the index at 28, which would take house prices beyond the recent range, but still this is far lower than the high of the early 1990's

2. UK Money Supply
With the UK money supply running at the rate of 13%, its no wonder the housing market continues to defy gravity and chug along the highs. This excess supply of money is causing inflation , its called house price inflation and effectively devaluing the value of your £.

The worlds ultimate hedge against inflation is Gold, and in gold terms the price of Houses have actually fallen over he last few years as inflation reappears onto the scene. In Jan 2005 the price of an average house was £150,000 the price of gold in sterling was £204. Therefore average houses were valued in 735 ounces of gold. Today with gold at £317 and average house prices at £170000, the average house is worth 536 ounces of gold, a fall of 28% !!! So far this fact has had no effect on the UK consumer.

3. The UK Economy
Is a significant factor in the continuing uptrend in UK house prices, the strength of the UK economy which continues to deliver year on year economic growth and wealth, this is an important contributing factor to the growth in house prices as the money earned is invariably plowed back into the housing market.

4.Immigration
As a consequence of recent EU expansion, strong economy and liberal employment laws. There has been a large influx of migrant Labour in excess of 600,000 from the Accession States, this has supported the continuing demand for properties in the buy to let market.

Conclusion
House prices will continue to be supported along the highs and maybe drift higher as long as the situation remains positive with regards all of the four above factors. Even a rise in interest rates to 5.25% is unlikely to effect the situation significantly. It would require an interest rate hike to above 6% before we are likely to witness a significant house price decline, as that would put the index far above the current range.

Nadeem Walayat

(c) MarketOracle.co.uk 2005-2006

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