Why is the housing market not obeying the rules of supply and demand? Or is it?

From moneyhospital.co.uk website.
Hands up those who have sat through economics lessons at school or university? Those of you now with your hands up will certainly remember that the law of supply and demand is just about the first thing that you learn.

As far as I know, the law still holds good, so can we apply this basic principle to the UK housing market? Economics101 says that if demand exceeds supply, prices rise. As prices increase, more people are encourage to sell but less people are willing to buy, bringing prices back down again and so on.

So what do we see at the moment? On the demand side, people still want to move house, first time buyers want to buy and there has been some reduction in prices to encourage people to want to buy. Of course, inflation and freezes in wages have constrained demand to some extent but mortgage rates are at their lowest since records began, according to Moneyfacts.

On the supply side, there seems to be a pent up desire to sell. The National Association of Estate Agents reports an average of 275 sellers registered with each member, up from 265 in May last year.

So demand is there, supply seems reasonable, is the market showing the expected signs of recovery? No is the plain answer, although, to be fair, the signs are a bit mixed. HMRC reported house sales of 73,000 in June, 5,000 up on May but 12,000 less than June 2010 when things were hardly rosy.

Is the old supply and demand equation not working? Let’s look at a few reasons:

•Demand is being held back by availability of mortgage funds. Whilst there are lots of low rate deals available and the base rate remains at 0.5%, many people cannot afford the high deposits demanded by lenders.
•Whilst people want to sell, they have an unrealistic expectations about the value of their property. Don’t forget that for some years, property was seen as the best investment by many and they have grown up expecting to cash in on rising house prices.
•Rightmove recently reported that the average asking price nationwide was £236,597 but, depending on which survey you believe, the average actual sale price is some £33,000 (DCLG) or £73,000 (Nationwide) lower than the asking price! That is a massive gap by any standards.
What happens next? Is there a dam of house purchases waiting to burst and, if so, what will cause the breach: improved economic indicators, more mortgage finance availability, sellers accepting the inevitable and dropping asking prices?

Alternatively, will the Monetary Policy Committee eventually have to give way and increase interest rates to control inflation, further depressing the market and making everyone rush to re-mortgage? Price Waterhouse Cooper, in their UK Economic Outlook, predict that it will be 2020 before prices are back to their previous peak. Doubtless in the long term, the housing market will recover as it always has to date but, as Keynes said “in the long term, we are all dead”.

Unfortunately, my crystal ball is broken but one thing is certain, there are some very good mortgage deals to be had at the moment and it is hard to see how they can get much better. The Times reports many mortgage brokers recommending that now is the time to take the plunge and lock into a low cost fixed rate deal while you can.
James Wyatt of Barton Wyatt commented on this article “this is an interesting piece and clearly outlines the problems the housing market has on a countrywide basis, but London and certainly our area have a strong market with prices already at or even above the previous peak levels – no waiting for 2020!”.