HBOS ECONOMIC FORECAST FOR 2006
Key points
* The housing market is expected to be flat in 2006 with modest nominal house price growth and no change in real terms. UK house prices are forecast to rise by 3%, broadly in line with the predicted rise in retail price inflation. House prices have risen by less than the long-term average (8% per annum) in 2005 for the first time since 2000. Growth is expected to remain below the long-term average for the second successive year in 2006.
* House price inflation is likely to rise further in early 2006 before easing later in the year. The annual rate of house price inflation is expected to increase during the first half of 2006, potentially reaching a peak of 7 - 8% mid year as modest price rises compare with slight falls in early 2005. The annual rate is subsequently expected to fall as prices rise at a significantly slower pace than in the second half of 2005.
* We expect earnings growth to outstrip house price growth in 2006. Average earnings are predicted to rise by 4.5% in 2006. As earnings growth outpaces house price inflation, the ratio of house prices to earnings will ease from a peak of 5.6 in mid 2004 to 5.4 at the end of 2006. This reduction will make it slightly easier for first-time buyers to get onto the housing ladder.
* Housing market fundamentals are sound. Continuing economic growth, the high level of employment — which has risen to a record level of 28.81 million despite the slowdown in economic growth over the past year - robust earnings growth, and the prospect of further interest rate cuts are all likely to support a healthy level of housing demand.
* A number of factors should prevent a renewed surge in house prices. Both council tax and utility bills are expected to rise by well above inflation in 2006 causing non-mortgage related housing costs to rise from 66% of total housing costs in 2005 to around 70% in 2006. This will put pressure on household finances and more than offset the expected benefit of lower mortgage rates.
* The pricing variation between regions is likely to compress for the third successive year. Low single digit growth will be the norm for most regions. The biggest gains are forecast for Scotland (7%) and Northern Ireland (5%) where prices are lowest in relation to earnings.
* As buyers hunt for bargains, towns recording the biggest price rises are likely to be close to major conurbations. Towns with house prices below regional averages are most likely to attract the attention of buyers in search of a deal. The following towns are expected to deliver the biggest price rises next year: Clydebank, Renfrew, Airdrie and Wishaw (all in Strathclyde) and Nelson and Burnley in the North West. All these towns currently have an average house price that is either below, or just above, £100,000. There are now only 11 towns out of the almost 500 surveyed across the UK where the average price is below £100,000.
- We expect to see some signs of modest recovery in the south and the midlands during 2006. House prices, however, remain historically high relative to average earnings throughout these parts of the UK: a factor that will continue to curb housing demand and prevent a marked pick-up in prices.
* The pricing variation between regions is likely to compress for the third successive year. The biggest gains are forecast for Scotland (7%) and Northern Ireland (5%) where prices are lowest in relation to earnings. East Anglia (0%) and the South West (1%) are expected to record the smallest price gains.
* The north/south divide will continue to narrow. These increases should result in average house prices in the south being 1.5 times as high as in the north at the end of 2006 compared with 1.6 at the end of 2005. The north/south divide has narrowed substantially since reaching a peak of 2.2 in mid 2002. Taking a longer historical persepective, the north/south divide would still be slightly wider than ten years' ago (1.4 in 1996 Quarter 4), but below the 1.7 average over the past 20 years.
* City bonuses to boost the upper end of the London market. Higher City bonuses than in previous years are expected in the New Year. This will boost demand at the upper end of the London housing market. This, however, is a very small segment of the capital's housing market. The three London boroughs with the highest average prices — City, Westminster and Kensington & Chelsea — account for only 4% of the total Greater London owner-occupied housing stock.
* As buyers hunt for bargains, towns recording the biggest price rises are likely to be close to major conurbations. Specifically, towns with house prices below regional averages are most likely to attract the attention of bargain hunters. The following towns are expected to deliver the biggest price rises next year: Clydebank, Renfrew, Airdrie and Wishaw (all in Strathclyde) and Nelson and Burnley in the North West. All these towns currently have an average house price that is either below, or just above, £100,000. There are now only 11 towns out of the almost 500 surveyed across the UK where the average price is below £100,000.
Homeowners
* Buyers have been putting down bigger deposits than in previous cycles. 81% of all new borrowers took out a mortgage of less than 90% of the house price during the first half of 2005, according to the CML. This was significantly lower than in 1989 and 1990 when 56% of new borrowers took out a mortgage of less than 90% of the house price.
* Far fewer 100% loans than in the past. The number of borrowers taking out 100% loans has remained consistently low over the past few years, comprising only 5% of new borrowers in first half of 2005 compared with 22% in 1990.
* Arrears and possessions are likely to remain low. The numbers of repossessions and cases of mortgage arrears both increased in the first half of this year, according to the CML. Both, however, remain at extremely low levels by historic standards. For example, the number of properties taken into possession during 2004 H2 and 2005 H1 was 7,710; just over 10% of the total in 1991 (75,540). In line with the industry, nevertheless, we expect a modest rise in arrears and possessions during 2006.
Mortgage Market
* The mortgage market is expected to be broadly stable in 2006 following a modest decline in 2005. Gross lending is predicted to total £290 billion next year compared with £284 billion in 2005. Net lending is expected to remain around £90 billion.
* The shape of the mortgage market will be similar. In particular, we expect the proportion of first-time buyers to increase modestly as affordability improves. Remortgage activity — estimated at 45% of gross lending in 2005 - is expected to remain close to the same level in 2006.
* Base rates are likely to fall further in 2006. Further evidence of below trend economic activity, and confirmation that the rise in oil prices is not raising inflationary prospects in the medium term, are likely to trigger at least one 25 basis points reduction next year.
Martin Ellis, Chief Economist, commented:
"The UK housing market is set for a period of broad stability with house prices forecast to rise by 3%, broadly in line with the predicted rise in retail price inflation. Low, single digit, growth is expected to be the norm across most of the country.
The cost of owning a home will increase driven, in particular, by bigger council tax and utility bills. Non-mortgage related housing bills could account for 70% of the cost of owning a home next year.
Continuing economic growth, the high level of employment, robust earnings increases and the prospect of further interest rate cuts will support housing demand during the coming year."
