Residential Property Prices Are Increasing! Or Are They?

The Nationwide House Price Index suggests that residential prices are broadly the same as this time last year, and furthermore that prices rose for the fifth consecutive month. So surely we are about to experience a boom in prices again?

However there has recently been a spate of warnings regarding the possibility of further property price falls. So what is likely to happen?

One reason to remain cautious about a sentiment that property prices will continue to rise is that turnover is at a low level. This indicates that demand is still low; prices simply do not increase at low demand levels, and when supply increases this will have a depressive effect on property prices as people have more choice.

Interest rates are also historically low, and if anything pressure on interest rates to rise will increase as we climb out of recession making loans less affordable. Australia recently increased its base rates by 0.25%.

I would expect property prices to reduce again over the next few months, as these recorded increases in property prices are seasonal. My thoughts are that property prices will fall further next year as the graph shows the current prices are at around their long term value, however experience has shown that the market tends to overshoot long term trends.

Firstly, why am I blogging about this, and what do residential prices have to do with business buying?

Well simple, often residential property forms a large proportion of any price paid for a freehold business, a B&B business for example, which has an alternative use as a larger home.

It also affects the valuation of the property; as if bank surveyors expects the value of a property to decrease they will be conservative with the amount they will be willing to lend.

Furthermore residential prices have a longer-term effect on the demand for businesses; during the property boom business buyers used equity or to finance their business purchase.

Also increasing property prices affects the general publics confidence as if they see that their assets are increasing in price they are more likely to feel confident about spending money, thus increasing every businesses profits and therefore value.

But does it really matter if you are thinking of selling your B&B? As if you intend reinvesting in property, prices are comparative anyway, and the property you buy will also cost you less.

The big issue is of course those business owners who bought at the height of the property market, taking on a large mortgage. They are looking at a large loss if they want to sell, either they have to take the financial loss or continue trading, as they are highly unlikely to find another buyer who will be willing to pay the same amount.

This entry was posted on 09/10/2009 at 12:19 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.