House prices could surpass £250K by 2018

Stacks of coins with monopoly-style houses on top

The cost of the average UK property will exceed £250,000 by 2018, a leading economic forecaster has predicted. The Centre for Economics and business research (Cebr) expects prices to surpass their previous peak in 2014 at £227,000, and push up further to £267,000 within the next five years.

In a report, published on 1 April, Cebr said that Help to Buy (a newly announced government initiative that will guarantee £130bn worth of mortgages from 2015) will increase prices before supply, as there has been little to no indication that investment will be made into building new homes to accommodate for the additional demand.

Cebr estimates that prices Help to Buy will push up house prices by up to 0.8% in 2014, but will have “no appreciable impact” on housing supply. In 2015, some 4,800 extra properties could be built as homebuilders respond to the higher prices. The report went on to project that small population and wage increases will be the driving force behind the ultimate 20% growth expected by 2018.

This news comes as a former risk management executive at the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (known colloquially as Fannie Mae and Freddie Mac), two government-sponsored mortgage enterprises in the USA, has warned the UK government to approach Help to Buy with caution.

Dr. Clifford Rossi warned that the government should keep its “eyes wide open” when considering its long-term risk exposure. He observed that a number of high-risk loans could be granted by lenders if the government does not assess the ability of borrowers to continue to repay guaranteed mortgages. If banks and other lenders found that a number of their mortgage customers default on their payments, with these mortgages guaranteed in part by the government, it could prove very expensive for UK taxpayers.

Indeed, recent history has shown that the government now treads on potentially shaky ground. The last time high-risk mortgages were granted en masse, the result was a global financial crisis which necessitated the £500bn bailout of UK banks in 2008. Though the original ‘subprime mortgage crisis’ began in the US, it had far-reaching implications and the lessons to be learned from it remain very much global.

On the other side of the fence

This is not to say that everyone takes a cautious view of the Help to Buy scheme. A managing director from a leading UK bank’s intermediary channel believes that the mortgage market could see resurgence over the next few years:

We think 2013 will be good but if the Funding for Lending Schemes and the right-to-buy schemes don't kick in the way they potentially could, we may see a fall at the end of the gross market figures for 2014.

“We do actually think that the mortgage market will come back slightly over 2015 as we go into 2017 and will have a more balanced approach in 2017.

David Finlay from Barclays

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.