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Some commentators have been predicting house prices falls in the UK for several years and it seems that until recently, these predictions were dumbfounded. However, in the midst of a credit crunch, homeowners have started to listen.

There are various reasons to suggest that house prices are overvalued and likely to fall as it continues to become increasingly difficult for first time buyers to get on the property ladder.

This is mainly due to the rise in house price to earnings ratio. However to some extent this problem has been got around by banks being willing to offer bigger mortgages compared to salaries.

Some high street banks will lend around five times a borrowers salary as banks also consider lending mortgages over a longer period.   This increased generosity in lending has helped to keep the market buoyant without addressing the underlying problem of overvalued house prices.   Traditionally, the view of the housing market is that it is not just an asset, but a place to live. With that in mind, the UK housing market is beginning to suffer from severe supply constraints.   

The number of new houses built is very small. Therefore, a change in demand magnifies any change in price and it only takes a small rise in demand to increase prices.   There are record levels of consumer borrowing in the UK. This is a combination of mortgage borrowing and personal debt like credit cards.   

The total level of debt currently stands at £1.168 trillion and even a modest rise in interest rates could have a very adverse effect on consumer confidence and spending making the housing market particularly vulnerable to any rise in interest rates that may occur.  

The problems at Northern Rock have severely dented consumer confidence in the mortgage industry which could mean that house price falls are necessary for the housing market to readjust.  

There have been reports of lower volumes in the amount of home loans taken out in recent months and the number of estate agents who have seen house prices increase rather than fall.

A lack of demand and confidence in the housing market is clearly behind the recent price slowdown as tightening of the mortgage lending criteria blocks many who are keen to take the housing market plunge.

However, if mortgage lenders filter the recent interest rate cuts into the market, demand should begin to increase which in turn would shield the housing market from significant price falls.  

The author is Mel Varley who is an experienced journalist specialising in mortgage and remortgage articles for the financial field.  

This article does not represent ‘financial advice’ as each persons individual requirements will be unique to their needs. If there is something in the article which you which to rely on then please check those details with any person from whom you purchase any product or service.

 The views in this article represent those of the author and not those of Netbasic Limited.