Surging activity in the housing market. But where will prices go
At last the housing market is on the move. The numbers of mortgages agreed in December and January were some 50% up on the same period in 2004.
During the 2002 to2004 period we saw a steady decline in the number of house sales but already this year the Royal Institution of Chartered Surveyors is predicting that we will see a steady increase.
House prices themselves stalled 20 months ago but in December, prices rose by 1.4% - the biggest increase since July 2004. The rising trend was confirmed by the Bank of England which recorded similar rises in both the number and value of mortgages.
The housing market had been creeping up ever since the quarter percent drop in interest rates to 4.5% last August. But this is the first real sign of a big improvement. Pundits now seem to be predicting that prices will accelerate in the first half of 2006 with growth flattening off in the second half. It is clear that the public’s confidence in property is now returning, brushing aside the gloomy predictions by some City commentators last year that prices would crash 20-30%.
In our view, double-digit price increases will be difficult to achieve in 2006. That’s because incomes are rising around 3% and even at existing price levels, buyers are already stretching to afford the finance. Of course we’ve always seen price hot spots and if the rumours of huge bonuses for merchant bankers in the London are true, then Canary Wharf and Greenwich may catch alight!
However, the wider economic climate is still a cooling - a trend that’s being exacerbated by soaring fuel costs. As a result, increasing house prices will present the Bank of England with a quandary. Observers were forecasting that the Bank of England would cut interest rates by a quarter percent this spring followed by another similar reduction later in the year. But if house prices continue to rise, the Bank will be loath to encourage the housing market too much for fear of sending prices markedly higher again.
Our bet is that nationally, house price rises will be in the 6% to 9% range this year.
