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House price worries...

Property prices are affected by several factors. The underlying trend is national GDP (the usual measure of economic growth) but there are other influences that can cause substantial departures from trend even over quite long periods. The basic laws of supply and demand apply especially to houses.God stopped making land a few billion years ago, and therefore demand will always exceed supply as long as more and more people are chasing less and less space. House prices are essentially demand-driven: it is people's ability and desire to buy that largely decide the price level. Since housing is mainly a local market, it is the ability and desire within the vicinity that matters. House prices in Manchester are not affected directly by salary levels in London. Moreover, housing isn't a single homogenous market: houses in the highest price levels are not seriously affected by what happens in, say, the first-buyer market.

Ability to buy depends on income levels and interest rates. (It is also a function of social changes too: with more younger women in well-paid jobs, and delaying having families, the prices of starter homes and the next few levels have risen much faster than wages since they have been driven by two incomes rather than one). Desirability depends on various factors of course - mainly to do with location (transport, trendiness, schools, etc).

What does all this mean? Over long periods, house prices can be expected to rise, on average, in line with economic growth. Differences in how that growth is shared between areas and income levels will decide relative prices. Interest rates tend to drive short term departures from trend. If growth has been well above trend for some time we can expect a slowdown. If interest rates rise, we could see prices falling, especially in the buy-to-let market. Prices have been rising faster than trend and a slowdown seems to be a feature of some housing in some areas. The lesson is to remember that your home is a home first and an investment second: don't get too excited by the ups and downs and don't borrow more than you can reasonably afford if rates rise (which doesn't seem to be likely in the near future). See more on property here.

 

  9 October, 2008 © 2008 K.R.Wade and Co Ltd prev page next page