UK House Prices: House Price Collapse in UK? is it likely

With interest rates set to increase in the near future some commentators argue this could be the signal for house prices in the UK to collapse either at the end of 2007 or in 2008.

In the US house prices have been falling significantly. The reasons for the fall in US house prices can be seen here: Fall in US house prices.

However there are various reasons why the UK Housing Market is different to the US housing market.

Why House Prices are unlikely to Collapse

1. Differences in Sub Prime Market.

The US sub prime market was more aggressive in its sale of "bad credit mortgages". Although the UK mortgage lenders have become less stringent they still retain more safeguards in checking a mortgage plan is payable.

2. Shortage of Supply in UK. Excess supply in US.

In the UK there is still a fundamental underlying shortage of housing. In the US there is a growing surplus of housing. The excess supply of housing is a consequence of the irrational exuberance generated in the housing boom of 2002-2005. There is an increase in the number of houses without owners.

3. Differences in Interest Rates.

US interest rates have increased from a low of 1% in 2003 to their current rates of 3.5% This has had a significant impact on increasing cost of mortgages. In the UK the increase in interest rates has been a smaller and more gradual process in last year UK interest rates have only increased by 0.75%

4. Population growth.

The UK is witnessing an increase in the number of households. This is caused by:

Immigration from Eastern Europe
Demographic Factors such as rising number of single people.
Aging population, increasing number of old people living alone.

Combined with a shortage of supply this explains a significant reason for increase in UK house prices.