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Estimating property supply and demand is a dangerous game
The bulls are lining up to predict better times ahead for UK house prices. Japan's history holds a warning, says Andrew Oxlade.

With any market, supply and demand drive the direction of prices. On house prices, we’re told the balance is shifting rapidly. In fact, the Ernst & Young ITEM Club, a forecasting group, today declared that a “win, win” scenario lay ahead - for homeowners, at least.

It said incomes would edge higher, largely thanks to the rise in the personal tax allowance for most Britons, and predicted that mortgages would continue to become more affordable, pushing up prices.

Home loans are becoming cheaper chiefly because of the Bank of England’s Funding for Lending Scheme, backed by the Government, which is offering £80bn of loans at rates as low of 0.25pc, to banks and building societies. The result has been a fall in mortgage rates, and the Bank is predicting more declines to follow.

The effect was underlined today by figures from the Council of Mortgage Lenders which showed that the number of first-time buyers in the first two months of the year was at its highest level in five years.

The ITEM Club also said the improving affordability effect would be "multiplied" by the Chancellor's new Help to Buy scheme, which began at the start of the month and is due to be extended beyond newbuild next year.

Rates also remain at rock bottom and quantitative easing helps keep mortgage costs pinned down. Demand, therefore, is clearly being supported, by the State if nothing else.

On the supply side there are clear constraints. Government forecasts suggest the number of households in England will grow from 21.7 million in 2008 to 27.5 million in 2033, which implies an average 232,000 homes must be built each year to keep up with demand.

But the most recent figures from the Home Builders Federation show permission was only granted for 45,000 homes in the final quarter of 2012. This was a vast 66pc improvement on a year earlier but the total falls short of a theoretical target of 58,000 required to match projected demand.

Of course, measuring these forces of supply and demand can only ever be theoretical.

The notion of a restricted number of places to live on an island nation with an attractive standard of living is compelling for those painting a bullish outlook for house prices.

But recent history illustrates the danger of believing the forces of supply and demand can be co-ordinated into a forecast. In Japan, an island state more densely populated than the UK, the population grew from 123m to 128m between 1990 and 2011, over which time period Japanese house prices plummeted.
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