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Why UK House Price Collapse is Unlikely

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With interest rates set to increase in the near future some commentators argue this could be the signal for house prices in the UK to collapse either at the end of 2007 or in 2008.

Worries over the UK housing market have increased due to turbulence in the US housing Market. In the US house prices have been falling significantly. However, the reasons for the fall in US house prices are somewhat different. There is no reason it has to occur in the UK.

However there are various reasons why the UK Housing Market is different to the US housing market.

Why House Prices are unlikely to Collapse

1. Differences in Sub Prime Market.

The US sub prime market was more aggressive in its sale of "bad credit mortgages". Although the UK mortgage lenders have become less stringent they still retain more safeguards in checking a mortgage plan is payable.

2. Shortage of Supply in UK. Excess supply in US.

In the UK there is still a fundamental underlying shortage of housing. In the US there is a growing surplus of housing. The excess supply of housing is a consequence of the irrational exuberance generated in the housing boom of 2002-2005. There is an increase in the number of houses without owners.

3. Differences in Interest Rates.

US interest rates have increased from a low of 1% in 2003 to their current rates of 3.5% This has had a significant impact on increasing cost of mortgages. In the UK the increase in interest rates has been a smaller and more gradual process in last year UK interest rates have only increased by 0.75%

4. Population growth.

The UK is witnessing an increase in the number of households. This is caused by:

Immigration from Eastern Europe

Demographic Factors such as rising number of single people.

Aging population, increasing number of old people living alone.

Combined with a shortage of supply this explains a significant reason for increase in UK house prices.

Interest Rates likely to Peak soon

Inflation is still quite low. Moderate rises in interest rates are likely to be sufficient to reduce any lingering inflationary pressure.


About the Author

Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He enjoys writing essays on Economic and he edits an Economics Blog focused on UK and US economies: http://www.economicshelp.org/econ.html


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Article Published/Sorted/Amended on Scopulus 2007-05-30 01:09:29 in Economic Articles

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