There is a theoretical answer to this question, just as there is with the stock market, or any market for that matter. Understanding that, and the key drivers, will help you navigate emotional decisions around any purchase or sale.

So, what are the key drivers?

Liquidity with banks and their willingness to lend and at what levels, is one of the greatest drivers. If the Loan to Value (LTV) offer is decreased from a 100 per cent loan, to, say 90 per cent, this clearly leads to a reduction of the market. At an average house price of around £283,000, one requires a £28,300 deposit on top of the stamp duty and solicitor legal fees. Like much of what I will mention, it will increase or decrease demand. So, the greater bank liquidity and their willingness to lend, the greater the market.

Similarly, and still on liquidity, the rate at which lenders will lend drives affordability. The higher the rate, less people meet affordability tests and lower demand further. In fact, those who want to borrow are told they must borrow less to be accepted. Interest rates are falling and have been for a while.

Government policy has an influence on affordability. A reduction in stamp duty cuts out a barrier to entry. Think of how people talk about affordability in the modern world. The capital value cost isn’t the issue, it’s the monthly affordability. And so having to come up with a further £2,800 approximately on the average house price can mount up.

There are plenty of other key factors which can affect house prices such as the state of the economy, government building policy, rising, or falling incomes, job security leading to paralysis of mind, and overseas demand due to a low sterling.

Much of this economic analysis is not at the forefront of decisions, given that it is not really the skillset of the average buyer. The greatest driver in my 35 years of all ups and downs is…’sentiment’, which of course drives all the aforementioned supply and demand issues.

Look to the headlines for sentiment. Take the last headline point of foreign investors above. “The number of foreign buyers has tripled since 2010”. With low sterling rates from overseas buyers, they receive a substantial discount so the expectation is they will buy up more UK assets. The reality is that overseas buyers are actually just one per cent of the market.

Headlines, even at the FT (and of course driven by the Bank of England’s (BOE) communications to slow things down), have been interesting.

In October/November buyers would have been panicking with “UK house prices fall for sixth consecutive month”; “UK house prices drop 13.4 per cent from peak”; “UK house prices suffer first annual fall since 2012”; “fall for sixth consecutive month”. I could go on for a very long time. This is just one quality paper. Within a week they flipped to “rise unexpectedly on scarcity of supply”; “mortgage approvals beat forecasts to hit three-month high”; “prices beat forecasts to rise again”; “extend recovery for second month”.

Dramatic headlines can create paralysis via negative sentiment because the vast majority of buyers are not economists who can look through data.

The fact is I can book money today for six months from now at a rate 0.25 per cent less than today’s base rate. That’s the forward price. Rates are still falling. It is only when those headlines come from the BOE (they aren’t ready for that yet as the economy is still stronger than they would like) that the press headlines reflect the new reality, and those ‘waiting to see’ will have missed the ‘bottom’.

Markets move around, that’s just it. Avoiding buying at the top of excitable sentiment is a good plan, just as is selling at the negative end. Outside of that, there are moments when those with secure incomes take advantage of a slow market by squeezing those who are motivated to sell – ie - they need to move for a job or to another home.

This, of course reflects in the prices registered at the land registry which shows that prices have indeed ‘fallen’ which is simply a reflection of a confused market, pausing to see where things are going, and those looking to sell lowering their prices.

  • For advice on your mortgage, please email my Mortgage Director Pat Greene on pgreene@wwfp.net or call 01872 222422. Also ask Pat for the latest copy of our Mortgage Interest Rate Guidance Report.
  • Peter McGahan is the Chief Executive Officer of Independent Financial Advisers, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.