UK House Prices Situation: Strong

UK House Prices Forecast: Mixed forecasts for 2007.

Shortage of Supply Drives House Price Growth

Nationwide this week forecast that house prices would rise a further 5%-6% in 2007, despite recent rises in interest rates. Analysts increasingly believe that a shortage of supply is currently the dominant factor driving UK house price growth, rather than the cost of borrowing.

The rapid rise in single-person households and the restrictions on new housing developments in some areas of the country mean that some areas of Britain are experiencing a shortage of residential property that can only gradually be remedied.

This theory was given further credibility with data released by the Royal Institute of Chartered Surveyors (RICS) this week. RICS members have reported an increase in demand for properties in recent months, and data from October shows that the ratio of homes sold to homes on the market is at its lowest level for 2.5 years. This ratio provides an indicator of the strength of demand for properties.

House Prices Most Overvalued Since 1948?

The Financial Services Authority this week instructed banks to model the effects of a 40% slump in their stress-testing models, after finding that some banks' testing was insufficiently pessimistic.

The FSA emphasised that they were not predicting such a slump, but that it was necessary for banks to model such an eventuality to ensure that their mortgage portfolios were sound.

In a separate report issued this week, investment bank Dresdner Kleinwort released research showing that by conventional measures, the housing market is presently more overvalued than at anytime since 1948. However, the report stressed that while property prices are high in comparison to incomes, mortgage payments are still relatively affordable, meaning that a dramatic fall in prices was not a foregone conclusion.

Surveyors (RICS) this week. RICS members have reported an increase in demand for properties in recent months, and data from October shows that the ratio of homes sold to homes on the market is at its lowest level for 2.5 years. This ratio provides an indicator of the strength of demand for properties.