November 28, 2006 | posted by Michael Baxter in IABN |

The Centre of Economics and Business Research has released a note via its regular Forecast Eye Bulletin, outlining the reasons why it says house prices will never crash in the UK.

It says with “the ratio of house prices to incomes” increasing from 4.4 to 7.9 since 1996″, it is an easy and lazy argument to make that the house price inflation seen in recent years is driven by speculation. This argument is false, it says, for the following reasons.

” First, the United Kingdom does not have a large enough stock of houses. In 2005, 193,000 new houses were built - the highest in over fifteen years. In her housing review in 2003, Kate Barker said that to bring real house price growth down by a significant amount, the United Kingdom needs to build 245,000 houses every year. Government planning restrictions and schemes such as key worker housing, prevent the construction sector from fully responding to the house market’s price signal. ”
“Second, population growth - boosted because more of the world’s people want to live in the United Kingdom - and an ever smaller household size, means that there are more people who need to live in houses than ever before and, also, that more houses are needed per person.”
“Third, when thinking about buying a house, potential house buyers do not compare their income to the price of a house. Rather, they compare their income to their annual mortgage payments. With interest rates at or below 5.0 per cent in recent years, mortgages remain affordable when compared with the early 1990s. Although mortgage payments as a share of household income have risen from 15.0 per cent in 2001 to 19.6 per cent in 2005, they remain well below the 34 per cent recorded during the 1989 crash. ”
“Fourth, the new large and rich countries of the world - oil producing countries and the Asian dragons - remain happy to park their new found wealth in the world’s main financial centres: New York and London. A significant amount of money that flows in to the City of London, by one mode or another, ends up in the property market. ”
“Fifth, because of the nature of economic growth it is natural that certain areas of the country will see more economic activity as the economy expands. Because of lack of transport infrastructure, these growth areas are unable to geographically increase their labour catchment areas, meaning that more people need to live in certain locations - exacerbating the mismatch of supply and demand. ”