The Woolwich confidence balance has been rallying since March when it reached this year’s low point of 50 per cent. This upward trend has seen confidence reach its current level of 60 per cent and this is now reflected in the annual rate of house price inflation, which increased for the first time in October after falling back from March.
On its own confidence in the housing market suggests that annual house price inflation is going to continue well into 2004, however while house price growth has held up better than many pundits have expected, the recent rise in interest rates when combined with the prospect of Britons having less income in 2004 will play a crucial part in determining the future outlook for property market:
- People’s income has fallen by 0.7 per cent in the year to September when you take into account the impact of inflation and the effects of increased taxation. Significantly, people’s income is not going to grow to the extent that it will be able to support the high rates of house price inflation that we saw at the start of the year.
- Household debt burdens have increased to record levels. Total household debt as a proportion of disposable income now stands at a significant 130 per cent and the prospect of rising interest rates should mean that individuals will be unwilling to assume ever-increasing amounts of debt to fund house purchase.
- The sharp fall in first time buyers’ share of new mortgages to just 31 per cent in September is a long way from the long-run average of 50 per cent. This alone suggests that activity at the lower end of the property ladder looks set to slow, with the overall rate of house price growth moderating as this effect filters up to the middle and higher ends of the property ladder.
George Johns, economist for The Woolwich says: “The argument that house price growth is set to slow is compelling when you factor-in that the price of the average UK property looks overvalued in relation to the average income. Lets not forget that the psychological impact of the first interest rate hike since February 2000 will be far-reaching. It will almost certainly be a significant brake on housing market activity, particularly as households saddled with high levels of debt begin to adjust their finances to accommodate a higher interest rate environment.
“People are not going to have the financial clout next year to put significant upward pressure on house prices and we believe that house price inflation will fall to around zero by the end of next year.”
Mortgage lending
UK Gross Mortgage lending increased to a record level in October to £27bn (up seven per cent from £25.3bn in September). Overall mortgage lending continues to remain at record levels as remortgaging continues to drive the mortgage market. Gross mortgage lending is up 29 per cent year on year from £21bn in September 2002 to £27bn September 2003. The Woolwich expects lending volumes to remain high year on year as people continue to remortgage to historically low and competitive interest rates.
