House price crash 'very unlikely'

Monday, 27, Nov 2006 09:37

Following last week's big property market story where a leading economist predicted sharp falls in house prices within the next two years, another economist is arguing a house price crash is "very unlikely".

The Centre for Economics and Business Research (Cebr) has come up with five reasons why there will not be house price crash, in contrast to Morgan Stanley economist David Miles' predictions of significant falls in house prices (full story).

Jonathan Said, senior economist at Cebr, argues there will not be a crash because demand far exceeds supply in the UK housing market.

"The United Kingdom does not have a large enough stock of houses," explained Mr Said.

"Government planning restrictions and schemes such as key worker housing prevent the construction sector from fully responding to the house market's price signal."

Mr Said's second reason why house prices will not crash is the population growth of the UK.

"Population growth - boosted because more of the world's people want to live in the United Kingdom - and an ever smaller household size means that there are more people who need to live in houses than ever before and, also, that more houses are needed per person," argued Mr Said.

The affordability of mortgages compared to their early 90s' high was Mr Said's third reason for house prices remaining firm.

"When thinking about buying a house, potential house buyers do not compare their income to the price of a house. Rather, they compare their income to their annual mortgage payments. With interest rates at or below five per cent in recent years, mortgages remain affordable when compared with the early 1990s," Mr Said explained.

London's ongoing status as a financial centre and a lack of transport infrastructure keeping buyers focused on location were Mr Said's last two reasons for house prices staying as they are.

Mr Said concluded: "As long as supply continues to fail to react to the burgeoning demand or housing, it is very unlikely that house prices will crash.

"In our latest house price forecast, we see inflation slow from an average 8.2 per cent this year to 4.6 per cent next year and 1.3 per cent in 2008, before picking up again.

"Higher interest rates, tight household bills and the world economic slowdown will cut back house price inflation, making talk of a possible crash more of a pub topic.

"But as long as the fundamentals remain unchanged, a housing bust is very much off the cards."