The percentage of consumers who expect house prices to increase has soared by 11 per cent already this year from 56 per cent to 67 per cent. These figures are close to the peak levels ever recorded by the Woolwich - when in 2002 confidence peaked at 68 per cent.
Andy Gray, head of mortgages for Woolwich and Barclays says, "Consumers' confidence goes from strength to strength, but with further rate rises predicted in the second half of this year, we expect the rate of house price inflation to steady towards the levels seen in 2003. This means that consumers need to be realistic about the capital growth they can expect from their home in the immediate future, and view any purchase as a long term investment as we expect house price inflation to be neutral by the end of 2005."
While there are a number of underlying economic fundamentals that support further house price growth such as record low unemployment and a stable inflationary environment, the heady pace of growth is unlikely to be mirrored at today's rate in 2005, with the main questions surrounding consumer borrowing and the housing market;
1. The main reason for the resurgence of house price inflation since last autumn has been a record surge in buy-to-let investment as less first time buyers are able to enter the market, when this area of the market calms down we expect the rate of house price inflation to decline.
2. As the house price earnings ratio is now 5.5 and rising against a historical average of about 4.0, earnings need some time to catch up with borrowers level of affordability.
3. The expectation of interest rate rises will see consumers having to tighten their belts as they budget around greater interest payments.
4. The experience of borrowers in the coming period will therefore be quite different from that of recent years. A move in base rates to say 5 per cent in 12 months time would take consumers total debt service burden as a proportion of incomes beyond the 1990s peak. We therefore expect the growth of borrowing to slow down quite significantly as interest rates continue to rise.
