The bi-annual Economic Report produced by the NAEA forecasts that the global economy will continue its recovery leading to stronger economic growth in the UK. The resulting combination of rising interest rates, council tax hikes, and reduced investor demand, will lead to a weaker housing market in 2004.
Increasing rates – but no crash
The report is predicting that interest rates will rise to 4.75% with the potential for mortgage rates to hit 6% for the first time since 2000. This could stretch some households re-emerging from cheaper fixed-rate and discounted deals arranged last winter. However no market crash is predicted because of the sustained low interest rates (a 6% mortgage rate is still very low by historical standards), and continued strong growth in earnings and employment.
Commercial market threatened
Both companies and individuals have significantly invested in property over the last two years, however intense competition has led to falling yields and rising capital values. Occupier demand has been weak, particularly for office and industrial property, leading to falling rents.
Rising interest rates, stronger equities and limited scope for further yield in 2004 will increasingly threaten the commercial property market, which will continue in 2005. The investment risk will increase further for commercial property as, to date, returns have been driven by capital growth rather than income from rent.
Yields are however expected to remain above the cost of funding for most property assets with total returns around 6-8%. Not the spectacular gains of recent years but still enough for the serious long-term investor.
Treasury reports - backlash
The two Treasury-commissioned reports published in December could have far-reaching long-term effects on the property market. The Barker Report examined ways to increase housing supply in relation to demand and could lead to changes in policy to increase the supply of affordable housing.
The Miles Report looked at the ways in which Britain can develop a market for long-term fixed-rate mortgages to reduce housing market volatility. Demand for these products is limited at present and so any changes introduced to encourage the take-up of such mortgages would fundamentally change the market.
However, the effects of the reports are unlikely to be felt strongly in 2004, due to the longer-term nature of the recommendations.
Peter Bolton King, Chief Executive, National Association of Estate Agents, commented: “We have seen another flurry of crash predictions at the end of 2003, but, as in the previous five years, the NAEA are staying off that bandwagon and instead looking at the evidence, all of which points towards a controlled slowdown of the market.”
