In the UK, we are just as obsessed with talking about house prices as we are with talking about the weather! And no wonder, the UK is unusual to the rest of Europe in that we tend to buy our homes rather than rent them. So, house prices are a huge talking point.
On the one hand, when prices go up, for those homeowners sitting on a nice bit of equity, it is great news. On the other, for people looking to move or get on the property ladder, high prices can restrict where and what they buy.
While we may still be feeling the effects of the global recession, it is reassuring to note (for property owners at least) that over the long term and while still taking in to account the slumps, house prices are increasing. According to Economics website Prime Economics, since 1993, national house prices have risen from an average of £62,333 to £247,000 – so, an increase of around 400%!
What has caused these rises?
This is due to a combination of many factors, from an increase in the Retail Price Index (RPI); the average annual wage; and the rate of inflation, as the figures demonstrate below.
- in 1993, the RPI was 62.944 – in 2012 it was 108.560;
- the average UK wage 20 years ago was £19,774 – rising to an all time high in 2008 of £24,683 – and last year settling at £22,524 (Source: Rate Inflation);
- the rate of inflation in 1993 was 2.5%, reaching 4.5% in 2011 and decreasing to 2.8% in 2012.
Plus, the availability of mortgages has increased over the last 20 years, with providers asking for less deposits (remember Northern Rock’s 120% LTV mortgages?) and offering more incentives – all these made it easier for people to buy their own property, causing prices to go up.
For landlords, a slump in house prices in late 2008 meant those that could, took advantage of snapping up low cost properties for rental.
In recent years, many people have also taken advantage of the historically low mortgage interest rates, again increasing demand.
Since 2008, following the economic crisis, house prices have seen a downward trend, with mortgage criteria tightening up and people simply not being able to afford to move. The latter half of this year, though, house prices are starting to boom once again. This is due to:
- once again more relaxed mortgage lending;
- a lack of new build homes due to companies going out of business;
- plus, Government boosters, such as the Help to Buy (HTB) scheme.
These factors, among others, have all created a demand for housing – sending prices up again.
The London Bubble
London is enjoying more than its fair share of house price growth as the following figures reveal:
- in the last 15 years, house prices have risen in London more than anywhere else – with the average Londoner paying over £300,000 for a house in 2012 compared to just over £70,000 in 1993 – that is more than a 420% rise;
- The Nationwide’s House Price Index for October 2013 reveals that house prices are rising at their fastest rate in the last three years – with a 5.8% increase since October 2012. London, however, has seen an annual price growth, reaching 10% in Q3 of 2013.
This could be, in part, that in many cases to buy your own home in London is cheaper than actually renting one. As this article explains, renting a £500,000 flat could cost around £2,000 a month. But get a two year fixed rate mortgage at just 2.39% and you’ll pay less than £1,800 a month.
The Government, concerned with the Bubble in London and South East, are looking to slap taxes on foreign property investors in a bid to tackle it. Reports say that the Chancellor is considering the introduction of Capital Gains Tax (CGT) for foreign property investors when they sell their property. Currently they are exempt from the scheme while British investors are liable to pay up to 28% on any profits they make from selling an investment property.
What is the impact of the continuing rise in house prices?
What must be noted is that while property prices have increased in recent years, nationally, they are still below what they were pre-crash. Some experts believe that a slow and steady increase in prices shows that the economy is recovering and that it is a good thing.
Other commentators believe that the HTB scheme and other schemes offering temporarily cheap credit will cause more financial problems for the economy.
Whatever your viewpoint, for people looking to get on the property ladder, buying their first home may be even harder than it has ever been, with prices rising at around 4% a year (yet average salaries dropping). This could lead to more people renting for longer – or even moving back home.