Homeowners start wetting themselves when they see news stories like the one attached below. The headline says "UK house prices could rise another 15% by end of 2007". What did you say? The homeowner thinks "I could be 15 percent richer by the end of this year. For doing what? Owning a crappy terraced house in some no-name town. "
Yes, the British just lap this stuff up. But looking a little closer at the story, and ask yourself what is the basis of this amazingly optimistic prediction? Well, it rests on one dubious observation and an outright lie. First - the dubious observation, some jokers from largely unknown forecasting group correctly predicted the rate of house inflation last year. Second - the lie - houses remain affordable at current interest rates.
Neither of these justifications are terribly convincing. Just because you predicted something correctly last year, doesn't mean that you will get it right this year.
However, the affordability argument is a killer. House prices are at over 6 times income. This ratio is at an all time high. Go back 10,000 years, and this ratio has never reached this level. Houses have never been so expensive. Houses are totally, completely and unbelievably expensive. The only reason that people buy them is because they get mortgages from banks to stupid to understand the risks inherent in a housing bubble.
Any housing bubble rests on two things; cheap credit and collective delusion. The Bank of England has finally understood that cheap credit must end. The collective delusion will take a little longer to dissapate. The British need to learn a simple lesson. We can't be idly rich, living off what is essentially a subjective perception of value. One day very soon, we will wake up. Those simple lessons are often the hardest. The wake up call will be very painful.
UK house prices could be 15% higher by the end of 2007, Lombard Street Research has said. The group, which correctly forecasted 10% house price growth in 2006, insisted recent UK interest rate rises would not quell the housing market.
It added that record mortgage lending, low stock of housing and interest rates pointed to a continuing boom. Longer-term, it warned that a property price bubble may develop, but not until 2008 at the earliest.
"House prices are not overvalued if you look at affordability with interest rates at just 5%," Diana Choyleva, Lombard Street forecaster, said. "Market momentum will be sustained in the near term and a weaker global economy should stop the Bank of England (BoE) raising rates more than a quarter of a percentage point in the spring.
"We are, therefore, forecasting house price rises of between 10% and 15% in 2007," she added.
If double-digit growth is achieved, Ms Choyleva warned that 2008 could see a bubble developing in the housing market.
On Wednesday, figures from the Council of Mortgage Lenders (CML) showed mortgage lending in November at an all-time high.
Many economic groups and mortgage providers have issued their housing market forecasts for the year ahead. Most have predicted house price growth at just above the rate of inflation. Lombard Street's prediction of double-digit growth is the highest to date. London, buoyed by large City bonuses, is widely predicted to lead the upward drive in prices in 2007.