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4 Reasons Why House Prices Are Set To Plunge Next Year


12-19-2014

 

House prices in the UK may fall significantly in 2015. Here’s why.

London home owners are cashing in and moving out

 

A Stronger Pound

While inflation has fallen to its lowest level in 12 years, modest increases in interest rates still appear to be likely in 2015. Certainly, the timing of them is up for debate, but the market is pricing in rises over the next year.

One consequence of a higher interest rate is likely to be an appreciation of the pound. This could hurt house prices, particularly in London and the south east of England, since in recent years foreign investors have been attracted to the UK partly because of its relatively weak currency.

A currency appreciation could make investing in the UK less attractive to foreign investors, but also increase the gains on property already held by foreign investors in the UK (in their domestic currency). The combined effect of this could be less demand for property and more supply (as investors look to cash in), which could send property prices downwards.

Less Affordable Mortgages

At the present time, mortgages are about as affordable as they ever have been. Certainly, loan-to-value ratios have been higher prior to the credit crunch, but in terms of interest rates, mortgages are currently hugely attractive.

Clearly, a higher interest rate will make them less so, which could mean that the current level of house prices becomes unaffordable for more people in the UK, simply because they cannot afford to make repayments at a higher rate. In addition, those already with mortgages could see their payments rise, which could lead to more defaults and sales of properties. The combined effect, then, could be a fall in house prices to more affordable levels.

General Election

It seems likely that another hung parliament will be the result at the General Election in May 2015. This will inevitably create considerable uncertainty both in the run-up to the election and also in its aftermath as a new government could change any number of housing-related policies.

For example, the Help To Buy scheme could be abruptly ended, restrictions could be placed to limit foreign ownership of properties, and a significant increase in the supply of housing could all have a negative impact on house prices.

In addition, first-time buyers may now simply wait until after the election before committing to  a purchase, thereby reducing demand over the next six months, too.

Mortgage Restrictions

Governor of the Bank of England, Mark Carney, stated recently that house price rises pose a major threat to the UK economy. As a result, restrictions have been put in place that limit the proportion of higher loan-to-value mortgages that banks can offer, while getting a mortgage is now more difficult in terms of the affordability checks that are in place.

However, restrictions on mortgages could easily be tightened up by the Bank of England. In fact, it seems rather likely that this will happen - especially when you take into account the comments made regarding house price rises by Mark Carney.

As such, house price falls could be on the cards for 2015, with a combination of the above four factors having the potential to hurt the UK property market to a greater extent than many investors currently realise.

That's why investing in shares could prove to be a more profitable move than buying property. And, to help you get started, the analysts at The Motley Fool have written a free and without obligation guide to 5 Shares You Can Retire On.

The 5 companies in question offer a potent mix of dependable dividends, exciting growth prospects, and trade at bargain basement prices. As a result, they could boost your finances in 2015.

Click here to find out all about them - it's completely free and without obligation to do so.

Peter Stephens does not own shares in any of the companies mentioned.

uk.finance.yahoo.com/

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