Interest rate hikes are making little difference to house prices, which have continued to climb and which many believe will go on rising this year. Prices have risen steadily for over a decade, and there are now fewer voices warning that the bubble is about to burst.
But there is still some uncertainty over the housing market, warns PricewaterhouseCoopers LLP (PwC), which says there is a one-in-three chance that house prices in Britain could be fall by 2010.
Despite the recent relative robustness of the UK housing market, potential homebuyers and investors should
not underestimate its volatility in the medium term, says John Raven, senior economist at PwC.
The chance of house prices in 2010 being lower than they are today could be around one in three.
And in November, investment bank Morgan Stanley warned of the likelihood of a sharp fall in the near future.
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Demand still strong
Others are more optimistic. House prices will rise by an average of 7 per cent in 2007, says Yolande Barnes, director of Savills Research, and substantially more in London and the South East. Demand for housing is strong, she argues, and people will use equity and other discretionary income to get the home they want.
And prime central London, mainstream London and the South East will see growth of 15 per cent, 12 per cent and 15 per cent respectively, because growth there is fuelled by buoyant financial markets, says Barnes.
With no sign of this weakening, combined with the prospect of City bonuses amounting to £8.8 billion, there will be plenty of cash for further investment in property, says Barnes. We estimate that £5.5 billion will go into housing at the top end of the market in 2007. Buyers from abroad will also drive the top end of the market, she adds.
London continues to see City bonuses inflate the housing market beyond the accessibility levels of most first-time buyers, agrees Ian Perry, spokesman for the Royal Institute of Chartered Surveyors, who points out that buyers have simply shrugged off rate hikes as prices rose at the fastest pace for over four years.
The rest of the nation is showing early signs of building up momentum as prices pick up in the laggard markets of the Midlands and northern England, he believes. The market is unlikely to feel cold winds from high finance costs until mid-year at the earliest as economic conditions are favourable.
And sheer demand will go on driving house price growth in 2007 and beyond, says Stuart Law, managing director of property investment specialist Assetz; he points out that demand is high due to immigration, divorce and changing lifestyle trends.
With unemployment and interest rates both remaining historically low, I expect growth to continue at a rate of between 8-10 per cent per annum in 2007 and 2008, says Law. Supply-and-demand imbalance, rather than the level of interest rates, will drive most of this price growth.
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Interest rate rises
Overall house prices have risen by 187 per cent since the housing market recovered in 1996, says Halifax research, and the outlook is sound thanks to a strong economy and high levels of employment. But interest rate hikes mean that house price rises are likely to slow because of affordability constraints, says Martin Ellis, chief economist at the Halifax.
At Nationwide, group economist Fionnula Earley is also cautious: Prospects for continued positive growth in both the housing and the equity markets look fairly good. With property prices at an all-time high, however, she believes that some investors will be more tempted by equities.
Rising interest rates, worsening affordability, falling yields on housing investments and lower expectations of future house price growth are all factors that we expect will slow the market in the coming months, Earley says, adding that sheer momentum means we can still expect to see relatively strong annual rates of growth in the short term.
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Hotspotting
And that growth will spread, argues Barnes: Money made in London will go into the ‘über towns’, including desirable market towns. Towns and cities within an hour’s drive from London and with good transport links, including Oxford, Cambridge and Guildford, are in a prime position, she argues, as are areas of beauty like Cornwall, Devon and the Peak District, where people want second homes.
At the National Association of Estate Agents, vice-president Chris Wood agrees: If an area is particularly exclusive or boasts natural beauty, property will always be in demand. Many parts of Dorset and Cornwall are great examples of this.
Attractive market towns command a premium, Barnes adds: the most desirable areas all have a good stock of period housing close to the centre, she points out, and good schooling too. At the NAEA, Wood agrees that some things never change: Certain factors will always have an impact on house prices. For example, people can expect to pay a premium for a property that is within a catchment area for a good school. Good transport links and accessibility to cities and towns are also likely to keep inflationary pressure on house prices.
Yet while the greatest rises are likely to come in London and the South East, there is a knock-on effect too, says Warren Bright, chief executive of Propertyfinder.com, who believes that prices will rise by just 5.2 per cent this year.
North of a line from Cheltenham to Chelmsford, there is a dramatic change in sentiment on the housing market. The strong performance of the City is driving the economy in the South, with rich bonus pickings supporting prices, he says.
Yet there is hope for first time buyers too: Elsewhere in England, more subdued expectations for house prices suggest housing affordability may actually improve when compared to wages.
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What to buy
What you buy can make all the difference, says Wood: In recent years, there has been an influx of new apartment developments, leading to a saturated market in some areas for this type of property.
So apartments, which have been a good investment, may be less tempting this year, he adds: I would advise people to be cautious of buying apartments purely for capital gain. However, if the apartment is in a good location and has great views, it is likely to retain its value and will always be popular with those looking to buy.
At Halifax, Ellis believes that family properties will do better than apartments. Things will continue to be difficult for first-time buyers at the lower end of the market, but buy-to-let investors tend to fill the gap for those properties, he adds.
For buyers already on the housing ladder, the outlook is good. And for anyone hoping to get on to the first rung, or a higher rung, more modest house price rises should make their chances just a little more favourable.
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How they work it out
How much is your house worth? That depends which house price index you look at, since the indices are calculated in different ways:
c Land Registry figures use a repeat sales regression method, measuring growth on houses that have been sold more than once and using data going back to 2000. The government’s Communities & Local Government mix-adjusted statistics are calculated from figures supplied by around 50 mortgage lenders.
c Halifax sources its house price data from the Halifax House Price Index, the UK’s longest-running monthly house price data series, with data covering the whole country and going back to 1983. The 538 towns surveyed in the report include the 32 London boroughs.
seasonally adjusted.
c The Assetz House Price Watch is an overview of the data supplied by the six main house price indices, including the Financial Times House Price Index, Nationwide and Halifax.
Find out how much your house is worth by visiting www.whatmortgage.co.uk/houseprice
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Contacts
c www.propertyfinder.com
c www.savills.co.uk
c www.assetz.co.uk
c www.nationwide.co.uk
c www.HBOSplc.com (Halifax)
c www.rics.org
c www.pwc.com
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