Despite uncertainty about how the housing market will be impacted by the disruption in the wider financial markets, a recent Building Societies Association (BSA) report has shown that house buyers actually are much savvier about their purchases than they may have previously been given credit for, and that a price crash is unlikely in the absence of a negative shock to the wider economy.
The underlying strength of the housing market was the key message from a number of renowned commentators on the market at an event to launch the latest BSA research report ‘House Price Expectations: An Insight Into How Consumers Think About Property Purchase’ on 17 September.
Price growth
Growth in residential property prices has largely been due to a wide selection of factors including low interest rates, lack of suitable housing stock, a buoyant economy and the ingrained desire in the British psyche to own property. Some commentators have cautioned that the market may be over reliant on consumers’ expectations that prices will continue to rise.
However, the results of this research do not back up these concerns. It shows consumers have a realistic view of the property market. For most, the primary motivation for buying a property to live in is derived from the satisfaction of owning a home, rather than the financial motivations of capital appreciation. Reassuringly for those critics, the results show that the majority of buyers have put considerable thought into their purchase, and have entered the housing market aware that property prices could fall.
Ipsos MORI quizzed 1,000 people who have either bought or considered buying a home in the last year. It found that 88 per cent of home buyers purchase their property because they want somewhere pleasant to live rather than in a quest for capital gain, and that 71 per cent of all buyers recognise that property prices could fall in the future. If prices did fall by 15 per cent, only 2 per cent of them would seek to sell, while such a fall in prices would trigger 27 per cent of investment buyers to seek to increase the numbers of properties in their portfolios.
As a consequence, it is unlikely that a fall in prices would lead to a significant crash in the market. Were prices to fall, the majority of people would stay in their existing property, restricting supply, while any substantial fall would encourage others to enter the market in the hope of picking up a bargain.
Predictions for the future
At the roundtable held to launch this report, this theme was echoed by Ray Boulger of John Charcol. He noted that many commentators are now forecasting that interest rates will decrease towards the end of the year, and affordability will improve as the cost of borrowing falls. He also commented that the high levels of Stamp Duty and other costs associated with moving home were now acting as a deterrent to people moving, encouraging people to stay where they are and further reducing the supply of properties coming onto the market.
Kevin Shaw, from estate agents Spicerhaart, agreed. Forecasting a continued increase in property prices, he attributed this to continuing supply problems. He said that this was not just due to the small numbers of homes being built, but that it was also a consequence of the high levels of Stamp Duty, while the new Home Information Pack requirements had seen a further reduction in numbers of properties coming onto the market.
Richard Donnell, from Hometrack, observed that although property prices are high, the majority of transactions are by people who are already home owners and who have significant equity in their existing property. Despite affordability problems, first-time buyers are still coming onto the market, accounting for 28 per cent of buyers. As a consequence, demand is remaining high, sustaining prices.
David Miles, from Morgan Stanley, agreed with further findings of the research that home buyer’s expectations are heavily determined by recent developments in the housing market. Although recognising the supply and demand issues raised by other speakers, he said that there was a risk that with perceptions of recent events being so important to buyers, predictions of ‘soft landings’ may not be accurate.
Credit crunch
Questions from the floor were, not unsurprisingly, dominated by the credit crunch. BSA director-general, Adrian Coles, summed up the feeling of the panel when he noted that the very best borrowers with relatively low loan-to-value ratios will continue to get good mortgage rates. Riskier borrowers wanting a higher advance will find it more difficult to get loans, with those loans still available being more expensive.
Overall, robust employment prospects are likely to support households’ confidence in their ability to finance ownership of property, adjusting other areas of their finances to cope with higher interest payments. Some significant shock to the wider economy is likely to be needed to trigger forced sales and a crash in the housing market.
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