Price surge in the UK Housing Market

Source: Future of UK housing market
http://www.ft.com/cms/s/0/0fefa96a-7e7c-11dc-8fac-0000779fd2ac.html

According to the IMF World Economic Outlood, the UK is at a serious risk for a steep housing market downturn. The most vulnerable markets include those where there is a pronounced disproportionately between property values and factors such as income growth, interest rates and demographics. Charles Collyns, deputy research director for the IMF noted that a comparison of price-to-rent ratio or price-to-disposable income ratios, both have increased significantly more in the UK than the US.

It is hardly news that UK housing is overpriced. Yet most analysts would predict that prices will not fall soon. The peculiarities of the UK market, including its planning constraints and a shortage of available housing, suggest that tighter credit conditions are more likely to result in a chill in an activity, than a depression of prices. As compared to the US, where an increase in land development has resulted in a glut of available property, the new housing supply in the UK is relatively modest.

Consequently, new developers do not feel the need to slash prices, so overall market prices are not as susceptible to competition. This inflexibility makes owners less tempted to sell. The unavailability of housing also extends to the UK rental market with only 8% of the supply open for rent in the last year.

These conditions have consequences for both consumers and lenders. According to Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors commented that according to the organization’s findings the market is tightening, with available property “even more Spartan” than the decline in sales. He said that the decline in sales could affect public finances because it would reduce tax collection from housing transactions, but that the decline is not likely to affect consumer confidence in the same was as a fall in prices would. Furthermore, lenders relying on wholesale funding opportunities may suffer as well if the tension between the supply and demand of housing dampens their ability to lend. However, at this point, it isn’t completely certain how any of these factors will play out.

Questions for discussion
1. In the US, comparable inflation of property values triggered a correction to valuations. Is a similar strategy likely to be successful in the UK market, given the differences between supply and demand of property?