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Supply/demand imbalance - cause for concern?

Supply/demand imbalance - cause for concern?

Category: Mortgages

Updated: 20/07/2017
First Published: 31/03/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

House prices have been rising rapidly over the last few months, and there's been concern among the industry that things could be getting out of hand. This feeling is perhaps verified by latest statistics from Hometrack finding that the level of housing demand is seriously outstripping supply, with there simply not being enough properties on the market to accommodate the growing number of buyers seeking a new home.

Their latest monthly housing survey found that home buyers are paying the highest percentage of the asking price in over 10 years, with the proportion being achieved hitting 96.2% – the highest figure recorded since 2004. In London it seems that sellers are getting even more, with them typically achieving over 99% of their asking price.

This is easily being driven by the ongoing supply/demand imbalance, with additional figures revealing that demand grew by 6.6% in March while the number of new properties coming to market grew by just 1.9%. It's no wonder, then, that buyers are willing to pay more for their new homes – with such intense competition from other buyers and a distinct lack of properties available to go round they're being pushed into offering more, and that, in turn, is pushing up property prices.

Hometrack's figures show that house prices increased by 0.6% in March alone with half of the country recording price rises, an increase that's confirmed by numerous other house price indices which show how rapidly prices are escalating – some measures even finding that prices have risen by 10% in the last year.

But what are the reasons behind these conditions? Arguably, it's a combination of record-low mortgage rates and increasingly strong demand from first-time buyers and investors, with Help to Buy playing a part too. These buyers don't have properties to sell themselves so they're boosting demand without adding to the supply, whilst competitive mortgage rates are encouraging more buyers of all kinds to get on the ladder. The level of scarcity in the market is compounded as a result, thereby fuelling both price rises and asking price achievements.

So, should we be concerned about prices rising too much, too quickly? Well, perhaps not, as data from the Bank of England paints a slightly different picture.

Their figures have revealed that the number of UK mortgage approvals actually slowed during February, reaching a total of just 70,309 – a stark drop from the 76,753 total in January. Analysts had forecast only a slight drop during the month thanks to the flooding that impacted parts of the country, with this fall being even more unexpected given that the number of approvals had actually increased every month since February last year.

However, the Bank said that the drop doesn't necessarily indicate a slowdown of the market as January's figure had been "erratically high", and to dampen concerns of a housing bubble it added that levels are still far short of those seen prior to the financial crisis, when the approval total hit around 90,000 per month.

It's hoped that additional factors could come into play which will reduce the possibility of a bubble forming, with the stricter mortgage affordability checks due to come into play next month as well as the possibility of base rate increasing in the not-too-distant future ideally keeping prices in check. It's also important to stress that there are still distinct regional variations, with not all parts of the country seeing demand rise to such record levels.

"While market conditions are improving it is important to note that there are large parts of the housing market with limited impetus for price rises as falling incomes, slower employment growth and limited access to credit constrain demand," said Richard Donnell of Hometrack.

"The deployment of enhanced Mortgage Market Review tests for mortgage applicants is expected to impact on demand from first-time buyers [while] deteriorating affordability in high price and high growth markets should start to act as a brake on price rises.

"The greatest impact on demand will come from an increase in interest rates or growing expectations of an interest rate rise. While any increases are likely to be small this is likely to be the most likely factor that checks the current growth in demand for housing."

So, although the market is enjoying a period of growth it doesn't mean prices will necessarily become prohibitive, and in the meantime it's important to take advantage of record-low mortgage rates while you still can. They won't be around forever, particularly with the prospect of base rate starting to edge up, so check out our pick of the best rates and see just how much of the asking price you can offer.

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