Average house prices grew by 0.3% over December, down from 0.6% in November according to Hometrack. The growth over December means that house price growth over 2006 has totalled 5.7%. This is the highest rate of year on year growth for almost two and a half years (the previous high was in July 2003).
"The big story of 2006 has been the strength of the bounce-back in London prices after the under-performance of values in this region between 2001 and 2005" comments Richard Donnell, Hometrack's director of research. The re-pricing process that occurred over this period meant the market started 2006 with clear headroom for growth. Robust levels of demand and an ongoing shortage of housing for sale over the year explains why London prices have grown by 12.1% over 2006. The highest growth was seen in the prime markets of Kensington and Chelsea and Islington where values grew by in excess of 20% over the year.
After London, growth over the year was highest in the South East (5.5%) and East Anglia (4.7%). In contrast, most other regions have seen relatively low levels of growth with the lowest increases reported in the North (+0.5%) and the East Midlands (+0.7%). The housing markets in these regions have been characterised over 2006 by the supply and pricing of homes for sale exceeding demand. This is a result of a continuing re-alignment of prices to levels that buyers are prepared to pay. Just as it took the London market 4 years for prices to re-align between 2001 and 2005 so these northern markets are experiencing a similar set of trends. The recent rises in interest rates are likely to have offset any decline in asking prices and kept affordability levels largely unchanged.
"While the headline measures of housing affordability appear stretched the reality is that in excess of 85% of housing transactions over 2006 were undertaken by households who are already on the housing ladder" comments Donnell. "The affordability pressures on these households are less acute than for would-be first time buyers. Continued demand from existing households combined with a lack of housing for sale could result in further upward pressure on house prices in the early part of 2007. In the absence of any external shocks to knock market sentiment, the demand for housing in 2007 will continue to be influenced by short term expectations over interest rates and the prospects for future house price growth" he adds.
"The problem is that the 'haves' who are already on the housing ladder and driving the majority of transaction volumes appear to have largely shrugged off the recent increases in base rates. If these buyers were to support a continued acceleration in house price growth over 2007, supported by low levels of turnover and a lack of housing for sale, then the risks of a downturn at some point in the future would certainly increase" Donnell notes.
Overall Hometrack expect average house prices to rise by 4% over 2007 with the strongest growth again expected in London and the South East. A continued lack of housing for sale is likely to keep an upward pressure on prices in London but question marks remain about the potential for growth outside the equity driven prime housing markets of central London where city bonus money has the greatest impact. Growth in most other regions is expected to remain below average as these markets move through the final stages of the re-pricing process that has been running for the last 2 years.
