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House prices are now 18% below their pre-recession peak

House prices fell 1.3% between November and December 2010 according to the Halifax. This meant a further fall of about £2,000 in the average price of a house, which now stands at £163,435. Overall, there was a fall in prices of 1.6% over 2010 as a whole, and house prices are now about 18% below their peak in the third quarter of 2007.

The reason for the fall in prices is largely due to the fact that potential buyers are staying out of the market, even though it has become much more affordable for first-time buyers to get into the market. Given the low rate of interest rates, the Halifax says that new borrowers only had to use 29% of their average disposable earnings to meet the typical monthly mortgage payment in the final quarter of 2010, as compared to 48% in mid-2007.

House prices are continuing to fall.

 

However, anecdotal evidence suggests that many lenders are proving exceedingly reluctant to grant mortgages, and putting increasing numbers of hurdles in the way of potential borrowers.

What happens to the market will also depend to a great extent on what happens to interest rates. Will the Monetary Policy Committee announce a rise in rates tomorrow, as the consumer prices index continues to rise unchecked?

Whilst the Halifax does not expect a major fall in prices this year, other analysts are predicting falls of between 5-10%. Given the fact that two-thirds of borrowers are on variable rate mortgages, and will face increases in costs if interest rates rise, this may force many to sell. This will obviously increase the supply of houses and put downward pressure on house prices.

On the other hand, as the Halifax says, “….uncertainty about the economy, weak earnings and higher taxes could put some downward pressure on demand.”

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Posted in Consumer Price Index, Housing, Interest rates, Monetary Policy Committee

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