The first quarter of 2006 has delivered a real mixed bag as far as house prices are concerned and the outlook for the rest of the year remains uncertain as a result. Forecasting is never an easy game, but with prices rising and then falling in consecutive months, and the performance of the economy not being quite as many had hoped for, looking accurately towards the end of the year has been difficult. Both the Halifax and Nationwide are sticking to their guns and predicting that prices will rise by around 3 per cent over the course of the year, although currently the rate of house price inflation is sitting just over the 5 per cent mark.
As 2006 rolled over the horizon the fundamental factors which had underpinned the market’s measured slowdown remained in place. Unemployment and interest rate levels were well down on historic averages, insufficient housing supply meant demand remained healthy and consumer spending over the Christmas period suggested an air of confidence in the country.
Certainly there seemed to be a confidence in the mortgage market given the figures released just before Christmas by the Bank of England. The number of loans approved for house purchase in December was 122,000. This was over 50 per cent higher than the level seen in December 2004 and the highest monthly figure for over 18 months.
The level of activity and the enthusiasm in the market was reflected by Nationwide’s figures, which put the rise in house prices during January at 1.4 per cent. However Halifax reported a fall in house prices of 0.4 per cent for the month and said a mixed pattern was beginning to take hold.
The two indices remained at odds with each other in the following month and February had Nationwide reporting a fall of 0.2 per cent, while Halifax had the market firming up to the tune of 1.4 per cent. Certainly it was becoming increasingly clear what Halifax had meant by a mixed pattern of returns from the market.
In recent years the market had been increasing so fiercely that it would have taken something with real impact to knock it off the rails. Now things are more delicately poised, pricing has been swinging to and fro at a much lighter touch. Although this may make some slightly nervous, it would seem to suggest that while demand and activity are still good, the biting constraints of affordability are really taking hold.
Room for a cut?
At the start of the year there had been a general feeling that a further cut in interest rates would come in the first six months of the year and, given the poor performance of the high-street since Christmas, this is increasingly likely.
The Confederation of British Industry (CBI) has reported sales on the high-street down in each of the first three months of the year and the outlook for the next three months does not look particularly encouraging. With this in mind, most agree there is room for 25 basis points to come off the Base Rate, in line with expectations. How soon this happens remains a matter of speculation, however the Monetary Policy Committee (MPC) will take heart from the gentle, if a little inconsistent, progress being made in house prices.
While the prospect of a reduction in rates will be music to the ears of the borrowing public, it is unlikely to generate any real surge in house prices. The market is still adjusting after the huge leaps seen since the turn of the millennium and salaries still have a way to go to ease the affordability constraints that remain in place. There are also a number of very early concerns over the labour market and while employment levels remain good, they have begun to slip slightly. Between November 2004 and November 2005 unemployment rose from 2.7 per cent to 2.9 per cent and so while the shift is by no means problematic at the moment, it is something that commentators are watching keenly. The rise in unemployment was not matched across the country and some places, such as Scotland for example, actually recorded a fall in unemployment levels over the same period, further helping it deliver stronger than average housing market returns.
Affordability constraints
The issue of affordability has been most prevalent in the first-time buyers market, where the average buyer is now 33 years old and requires a deposit of almost £24,000, according to Halifax. Last year only 15 per cent of first-time buyers were under the age of 25 in comparison to 25 per cent in 1995. The issues facing this section of the market will not disappear overnight and will continue to play an important part in keeping a tight rein on prices.
Indeed, some of the moves being made to help first-timers appear to be drops in the ocean given the problems they face. Shared equity schemes will have their role to play and the creation of extra funding for this is a welcome, if not dramatic, move. Although the Chancellor increased the Stamp Duty threshold from £120,000 to £125,000 in his Budget, this is only a rise of 4 per cent. With the current rate of house price inflation sitting around the 5 per cent mark, the increase will not grow the stock of housing that avoids the tax by any real size.
There is also evidence that the threshold is distorting pricing in the market as sellers price their property just shy of the mark to encourage buyers. According to the Council of Mortgage Lenders (CML), 14,508 properties were sold last year for between £119,000 and £120,000. However, on the other side of the tax threshold, only 805 homes were sold for between £120,000 and £121,000. Similarly, and indeed understandably, the same pattern emerges around the thresholds further up the scale.
To eradicate the distortion that the tax is creating in pricing, the CML is pushing for stamp duty not only to be levied against the amount paid above each threshold but also looking for the thresholds themselves to be raised in line with inflation. Currently such pleas have fallen on deaf ears and moving the lower limit to £125,000 will simply see house prices bunching at this level and do little to aid first-time buyers.
Despite problems of affordability borrowers are still incredibly keen to get involved in the market. This may be because buyers feel that while the market catches breath, now is their chance to get on board, or the traditional Spring upturn may have arrived a little early. Whatever the reason, February recorded record gross lending figures of £21.8bn. Indeed it was the fourth month in a row that a monthly record had been set giving some indication of the market’s health.
A solid footing
Although there is a lot of activity in the market, this will not necessarily feed through into price hikes given the other expenses involved in running a house. Halifax claims that the costs of owning and running a house during the 2004/2005 financial year rose by 7 per cent, showing inflation a clean pair of heels. Borrowers have been hit hard by council tax rises, while fuel bills are spiralling skywards. The growth in these ancillary costs will help keep property prices steady despite the demand that is currently present.
Having weathered the Winter without being adversely affected by the traditional slow down that normally accompanies the first quarter, house prices look likely to remain on a solid footing in the months ahead. It is unlikely, even if there is a cut in the Bank of England Base Rate, that this will fuel any real inflation in prices given of the surrounding factors of affordability.
For homeowners the real benefits are likely to come from cut-price mortgage rates brought about by the expected interest rate cuts and the huge levels of competition that exist in the UK market. Although the South East housing market has strengthened, the biggest winners will be in parts of the UK like Scotland where prices remain below average and employment levels continue to hold up.
While some may bemoan the fact that they are not seeing the same capital appreciation on their homes as in recent years, they should welcome the stability that a cooler market brings. For those looking to get on to the property ladder, today’s more sustainable growth will in time help them make that difficult first step.
Colin Snowdon is managing director of Freedom Lending
