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20 Aug 2008

Future UK house prices

What does the future hold for house prices in the UK?
Currently prices are definitely on a climb down, but prices have not dropped as much as the market needs, so house sales are slowing down dramatically. I would estimate that the true market price is probably a good 10% lower than the current asking prices because sellers are not facing up to the reality of the devaluation of their properties. Until sellers face up to this reality, the market will just slow down until the market prices reach the buyers expectations.
Who can tell what the real price is then?
It's subjective, each house has it's own demand pattern whether that be simply price-elastic or not. The market however could arguably be estimated based on past performance and if that is the case, then the future could be grim!
I took the graph (produced by the Nationwide Building Society) that I printed a couple of posts ago and (very) crudely extrapolated it with the precise instrumentation to hand ie. a ruler and a pencil, and this is the new graph that I came up with:
This graph shows us that the average price of a UK house could HALVE by 2015 before climbing again. The red line is the average price which is present on the original graph the line below that is a line I added to represent the lowest price when the market has slumped, the one above is the top prices at the peak of a boom. I have followed the general 'shape' of the previous boom and bust scenario's from the 70's, 80's and 90's to produce a slump that will reach it's lowest point in 2015 with average prices at around £92,000. Recently average house prices have been £185,000, so that indicates a drop of 50% over the next 7 years.
I was shocked by the figures I came up with and am the first to admit that these look like pure speculation (and they are speculation), but if the graph is accurate and the current market is subject to similar pressures, then you cannot just discard the findings of this crudest of measurements.
I cannot imagine seeing prices fall to this level, but after coming up with this illustration I just wanted to nail my colours to the mast now and say let's see how accurate this prediction is in a few years time. Makes you stop and think doesn't it? After all the market has reliably risen year after year - in the past the rise has been roughly equivalent to the fall in terms of both time and the rate of change. there is no reason to believe that the fall cannot be similar to my rough estimation, if we are honest with ourselves, we know full well that house prices are over-inflated, we may be somewhat reluctant to face up to the extent to which this is true. Bear in mind also the fact that at the lowest point the market will dip below a 'true-market value' whilst the market adjusts, and I am now starting to convince myseolf that this prediction is not as crazy as it sounds...
The really worrying thing about this crazy graph is if you try and work out what the next price-peak will be, it is about then that you start to think 'this cannot go on...something has to change'


Ross Taylor said...

I think the main difference between now and the last price slump is:

* Influx of people.
* Increase of renters.

I see the bottom end of the market levelling out soon (within a year). The rest of the market will fall into place soon after.

jay said...

My understanding is that the influx has stopped and is in reverse... and the rental market has slumped too. A recession will certainly discourage immigration, but may encourage renting. I stick by my prediction, let's see what happens...