Increased Supply In UK Real Estate Market Could Drive Prices Lower

Increased market supply and a tight economy are suppressing residential prices in the UK, reversing the trend of 2009 and enabling greater selectivity among buyers. Favorable interest rates …

Increased market supply and a tight economy are suppressing residential prices in the UK, reversing the trend of 2009 and enabling greater selectivity among buyers. Favorable interest rates that have helped sustain the UK housing market may not last, and prices are likely to continue their slide into 2011. See the following article from Property Wire for more on this.

Residential real estate prices in the UK fell the most in six months in August as increased supply of property gave buyers more bargaining power, according to the latest index to be published.

The Nationwide Building Society report shows that the average cost of a home dropped 0.9% last month to £166,507.  This follows a 0.5% drop in July. From a year earlier, prices increased 3.9%, the weakest pace since November.

The index also shows that the three month on three month rate of change, generally a smoother indicator of price trends, fell from 1.2% in July to 0% in August, suggesting that property prices have essentially stagnated over the summer months.

‘Unless house prices bounce back strongly in September, the three month rate of change will turn negative next month,’ said Martin Gahbauer, Nationwide’s chief economist.

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The annual rate of inflation, which compares the current average price with the price level twelve months ago, remained in positive territory at 3.9%. However, it is down quite sharply from rates of 6.6% in July and 8.7% in June.

‘Recent market trends remain consistent with an unwinding of the supply and demand imbalance that drove up prices for much of the last year. As more sellers have returned to the market, buyers have a greater selection of properties to choose from and more bargaining power with which to bid down asking prices,’ said Gahbauer.

Experts are predicting more price falls. Economist Howard Archer of IHS Global Insight, said the recent house price trend is downbeat. ‘We currently expect house prices to fall by 3% over the second half of the year, but there is a now a very real likelihood that the drop will be nearer 5%,’ he said.

‘It is hard at this stage to be optimistic about house prices in 2011 as the fiscal squeeze will increasingly kick in, which will hit people’s pockets and lead to serious job losses in the public sector. Consequently, a further drop of around 5% in house prices looks highly possible in 2011 and the drop could well be steeper still,’ he explained.

He added that much will depend on mortgage availability and the amount of houses coming on to the market as well as how well the economy holds up. ‘Therefore, we suspect that house prices will be at least 10% lower by the end of 2011 compared to their mid-2010 levels.

According to Gahbauer low interest rates will help soften the impact of the fiscal squeeze. ‘This is primarily because of the availability of attractive standard variable rates. Borrowers on variable rates have experienced a very large cash flow benefit from the reduction in the Bank of England base rate in late 2008 and early 2009,’ said Gahbauer.

‘The additional cash flow from lower mortgage rates has been instrumental in keeping arrears and possessions relatively low during the recession, helping house prices to stage the rebound seen between early 2009 and the middle of 2010,’ he added.

Although he warned that more households could be exposed to the impact of potential future increases in interest rates. ‘Should the proportion of variable rate mortgage balances remain high, the impact of base rate increases on monthly repayments, and therefore house prices, may be larger than in the past,’ he explained.

This article has been republished from Property Wire. You can also view this article at
Property Wire, an international real estate news site.

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