House Prices too high, but which direction are they headed?

 

Britain’s leading economists believe house prices are still too high. Despite significant falls in home values and initial signs that the economy is crawling its way out of recession, economists believe homes are still overvalued.

Out of 70 leading economists surveyed by The Financial Times, only 13 believed residential property prices were now fairly valued, while 55 said they were not and two did not express a view.

In the last few months the situation has been aggravated by a surge in prices. Figures released by Halifax last week showed house prices had jumped by 1.4% in November. This increase has largely been caused by a lack of supply, low interest rates and a weak pound, which has made UK property particularly attractive to foreign buyers

Ray Barrell, of the National Institute of Economic and Social Research believes House prices are still 10-15 per cent too high. While they have fallen below 2007 levels, they are still expensive relative to income. However, just because house prices are too high, does not automatically mean that they will fall further. Opinion is greatly divided.

Andrew Goodwin, of Oxford Economics, said “I wouldn’t expect another crash, more a gentle downturn in prices.” This view is supported by Savills who predict home values will fall 6% throughout 2010.  Richard Donnell, director of research at Hometrack believe values will drop 1% in 2010, mainly because of rising unemployment and slow growth in household incomes, which will cool demand. However, he also believes a shortage of homes available for sale will support prices and ensure falls are not too severe.

Not everyone is as pessimistic. The Royal Institution of Chartered Surveyors (RICS) believe house prices will overcome the “significant challenges” of higher taxes and higher interest rates to rise by 2 per cent by the end of next year. They say that, despite the expectation of monetary and fiscal tightening next year, the recent surge in demand for property, while supply remained low, would lead to an increase in sales. This will continue to put pressure on prices at least until the spring, before “slipping back modestly” for the rest of the year. This view is supported by Hamptons who have predicted price rises of 3%-5% during 2010.

Our opinion is more closely aligned with the former. RICS assertion that demand will stimulate the market is not fully convincing. Our Our Our Our Our Our Our Our Our OurOmOmOmn,msk,mcs,m   Whilst mortgage approvals have increased substantially in recent months, they are well below 2007 levels and are likely to remain so for some time. Also, as long as there is a lack of good stock, growing unemployment, little or no uplift in personal income, the threat of a further downturn in the economy and the residential property market is likely to make many buyers very cautious.

However, the significant drop in the market already experienced has meant that there are bargains still available if you know where to look. Also, price movements are likely to vary enormously according to location. Michael Dicks, of Barclays Wealth, believes the most expensive homes will benefit from a weak pound, but the rest of the market will probably suffer more. London and The South East will almost certainly continue to outperform the rest of the country this year. One thing is almost certain. The surge in the property market that we have seen over the last few months is unlikely to continue much longer.