Does The Middle East Affect House Prices?

The middle east, interest rates, supply and demand: which really has the greatest effect on house prices?

Many writers here at the Fool take a relaxed approach to housing market predictions. While some commentators are going nuts screaming 'Buy! Buy!' at their computer screens like day traders, we prefer to be more cautious.

The thing is, no one can know which way the housing market will go over the next few years. The governor of the Bank of England says he doesn't know, and he's surrounded by fellow economists all day (although some might say that was a disadvantage!).

So where is the housing market really at? One surveyor who took part in The Royal Institution of Chartered Surveyors' (RICS) August survey said "Even.instability in the middle east doesn't knock (house) purchaser confidence." I'd be surprised if it did! Since when did anyone say "I don't know, buying a house seems rather risky. What if Israel bombs Iran?"

Many RICS members also mentioned rising interest rates in this latest survey. However, I feel that as long as mortgage companies are constantly coming up with more ways to keep property prices rising, such as allowing mortgages on higher income multiples and devising mortgages for sharing between friends, the affect of interest rate rises on the demand for housing may well be negated.

To me, the biggest factor in the strength of house prices in recent years is the ongoing imbalance of supply and demand. There still appears to be far greater demand than supply and I don't see this being corrected any time soon. Even if we decided today to try to make room for two million more houses, it could take perhaps a decade or more for the country to get its act together.

Still, you can find some good deals. The August RICS survey stated that, in the East Midlands, "house prices have risen very moderately again, following last month's small rise, which marked the end of almost two years of declines." That's two years of declines against an otherwise rising market. However, you shouldn't feel that you have to move to Nottingham to get a lower price; there will be some relative bargains all across the country.

Overall, I'd say optimism in house prices seems reasonably robust, but this does not mean property is good value at any price. There is still a risk that prices may fall, as they did in the early 1990s. It's important to budget carefully when buying a house and not to overstretch your finances with too much in the way of mortgage payments. Consider what would happen if interest rates rose, you or your partner were not able to work, and whether you can afford your monthly payments once any introductory deal you have has expired.

Learn more about mortgages in our Fool's guide, and existing homeowners should learn the art of remortgaging on a regular basis. Finally, don't forget you can always compare mortgages here on our website.