WHY DO HOUSE PRICES KEEP RISING?

A question I am often asked, often by buyers struggling to get on the property ladder or sellers amazed at the offers coming in for their properties. The answer to the question? Like everything in property, there are a number of factors.

Firstly, and most importantly, house prices don’t always rise. They can also fall. Price rises tend to be gradual over time but falls can be very sudden and significant. Creating that illusion of boom and bust. Anybody who was selling houses in 2009 can tell you how suddenly and significantly that can turn when house prices fell 15% to 20% over the year.

However, despite ups and downs, you can see in this graphic that the general trend is that house prices do generally increase in the UK, over time.

Why?

The simplest explanation is supply and demand. We have a growing population and a limited housing stock. New build development is slower than needed – due to planning issues and large developers land banking – and has not kept pace with growing demand. In market conditions like this there will be a gradual increase in house prices as more and more buyers chase fewer and fewer houses. This has been particularly the case during 2020/21 where lockdown seriously reduced estate agents stock but demand continued to be strong.

Other important factors are interest rates. Interest rates have been at record lows since 2009 and this has the effect of making borrowing cheap and pushing up house prices. Often a mortgage is cheaper than renting and you are gradually purchasing an asset. With current record low interest rates this has further fuelled price growth.

Finally, there have been government interventions to boost the market. The recent stamp duty holiday lead to a big increase in demand because buyers were making ￡10,000’s of savings. This has ended, but it did drive prices further up at a time where there were fewer houses on the market. Government schemes such as Help to Buy supporting low income and first time buyers by new build properties, mixed with low interest rates, has really pushed up the price of new build properties.

Will these price rises continue?

Short term prices will level off and maybe even fall, a little. That is my prediction. This is the result of the stamp duty holiday ending and more housing stock coming on the market. Which will create more normal market conditions. I’m not talking about a crash, but rather a levelling off and a modest fall in some regions. Any rise in interest rates will also put pressure on house prices.

Will there be a crash?

At some point, yes, there inevitably will be a house price crash. This is because prices tend to rise gradually but fall quickly and dramatically. Not being in possession of a crystal ball, I can’t say exactly when that will occur. I would say that the price rises of 2020/21 look like something of a mini boom, so maybe there is a bust to follow? Whatever, anybody buying property should be aware that house prices go down as well as up.

Longer term the fundamentals are there for steady growth in property values. This is simply driven by supply and demand and the fundamental desire of people to have stability and own their own property.