If anything, the risk to our forecast is actually on the upside, as the three pillars that have underpinned the housing market during the last two years – low interest rates, good employment and good affordability – continue into 2004. Following two years of exceptional house price growth, house prices will continue to ease as the impact of higher interest rates coupled with the increasing problems facing first time buyers combine to put a gradual brake on house price inflation.
- 2004 will once again be the 'Year of the North'. Although house prices in the north have risen by almost 60% in total during the last two years, prices are expected to ease quite significantly from these very high levels during the coming 12 months. Following this years estimated 33% increase in house prices in the north, we forecast house price growth of 17% in the region during 2004. We anticipate that house prices will also continue to be strong in Scotland and in Wales during 2004 – we are expecting double digit house price growth in both countries during 2004.
- North/South divide narrows. The traditional north/south divide, which narrowed significantly during 2003, will continue to narrow during 2004, before re-establishing itself during 2005. Our figures show that at the end of 2002, the average property in the south cost 3 times as much as in the north. The gap has now narrowed and the average property in the south is around 2.3 times more expensive than in the north. This narrowing of the north/south divide is likely to continue in 2004, albeit at a gentler pace as prices moderate in the north and gently increase in the south.
- House prices in London and the South East will increase modestly during 2004. Following a period when the capital 'paused for breath', house prices in the London 'mainstream market' (properties up to £250,000) are expected to grow by approximately 8% during 2004 – around the same level seen in 2003, but still below the long term regional average (10%).
- High levels of employment, low inflation and a strengthening UK economy will continue to underpin the housing market. Mortgage payments remain low in relation to earnings and currently represent around 14% of gross earnings for a typical homeowner. We anticipate that UK bank base rates will increase during 2004 and end the year at around 4.50%. Assuming a base rate of 4.50%, mortgage payments will represent approximately 16% of gross earnings – very good affordability levels.
- The cost of owning and running a home continues to significantly increase. Even though mortgage rates have been at 50 year lows, the cost of running a home has risen very significantly. Separate research by the Halifax to be released next week shows that between 2001 and 2002, the cost of owning and running a house has risen four times faster than the rate of inflation. During this period, the figures show that the average homeowner spent, including mortgage payments, £5,604 on owning and running their home. We forecast that the true cost of owning and running a home will continue to rise quite significantly during 2004 as large council tax increases, coupled with hefty rises in utility bills, impact homeowners right across the UK.
- First time buyers will continue to face difficulties getting a foothold on the housing ladder. Traditionally the problems first time buyers have experienced trying to get onto the housing ladder have been confined to London and the South East. We are predicting that due to the very significant house price growth experienced in the Midlands and the North over the last 12 months, the first time buyer problem will extend over significant areas of the UK by the end of 2004. As a result, the number of first time buyers entering the housing market during 2003 is expected to be at the lowest levels since records began in 1974. As house prices continue to increase above the rate of earnings, the number of first time buyers entering the market is expected to continue falling during 2004.
Mortgages and Consumer Credit
- The rate of growth in mortgage lending in 2004 is likely to ease. The fundamental drivers in the mortgage market – low interest rates, good employment levels and good affordability – continue to underpin the market as a whole. We expect the mortgage market to grow from around £270 billion in 2003 to around £280 billion in 2004. With net lending volumes finishing 2003 at around £98 billion, we forecast that net lending next year is likely to be in the range of £90 - £100 billion. Transaction volumes are expected to slow in 2004 as the impact of interest rate increases, as well as the reduction in the numbers of first time buyers entering the market begins to take effect.
- Consumer credit is set to remain strong. We expect consumers' appetite for credit to dampen slightly during 2004 as projected interest rate increases begin to take effect. We expect net consumer credit lending to moderate from an estimated £19 billion in 2003 (down from £20.8 billion in 2002), to around £18 billion in 2004.
Savings
- The saving ratio, which represents the proportion of post-tax income that households save rather than spending, is recovering from the historic low it reached in 2000. In the 40 year period that the savings ratio has been published, it has varied from a high of 12.4% in 1980, to a low of 4.3% in 2000. During 2003, the savings ratio, at 4.7% was above its historical low, but was still significantly below the 8% average for the 40 year period. As UK interest rates start to rise and house price inflation continues to slow down, we expect to see the savings ratio to also begin to creep upwards over the next couple of years – with the ratio breaking the 6% barrier again by the end of 2005.
- UK households are getting wealthier. The rapid rise in house prices in the past few years has significantly increased the majority of homeowners' wealth, which has reduced the incentive to save as the value of most people's biggest asset has appreciated, making many feel more financially secure. The prospect of more house price growth and a rising stock market means that the UK household balance sheet will continue to strengthen during 2004.
Shane O'Riordain, General Manager, Group Economics, commented:
"The prospects for the housing market are good with house prices gradually easing back to around 8%, the long-term growth figure over the past 20 years. If anything, the risk to our forecast is actually on the upside, as the three pillars that have underpinned the housing market during the last two years – low interest rates, good employment and good affordability – continue into 2004.
Next year will once again be the 'Year of the North', with Yorkshire and the Humber, the North West, and Scotland, seeing large house price gains over the coming months. House price growth will moderate in the North, however, but will still remain in double-digit numbers.
Despite historically very low interest rates, the cost of owning and running a home will continue to rise during 2004 as significant increases to council tax, coupled with hefty rises in utility bills, impact homeowners right across the UK."
