Halifax predicts house price standstill after decade of rises

  • @_seanogrady

House prices will not rise at all during 2008, the first time in a decade that the property market has not posted gains, Halifax Bank forecast yesterday.

Britain's biggest mortgage lender said that, despite the Bank of England's decision on Thursday to cut the cost of borrowing by a quarter of a percentage point, the impact of the previous five rises had resulted in "a steady easing in house price growth during 2007". It added: "The impact of higher interest rates will bite further in the coming months".

Halifax's gloomy prediction follows a similarly downbeat forecast from Nationwide Building Society, while the Council of Mortgage Lenders is now expecting an increase of 1 per cent.

Halifax's downgraded forecast follows its warning that house prices fell 1.1 per cent during November. That followed a 0.7 per cent fall in October and a 0.6 per cent decline in September. House prices have not fallen for three months in a row since 1995.

Property transactions are likely to fall from an expected 1.2 million in 2007 to 1 million in 2008, Halifax added, though it said the picture on prices would vary around the country. The bank forecast modest house price growth in southern England and Scotland, offsetting small falls in northern England and the Midlands.

Halifax's forecast points to weak growth in disposable income as a further factor in the recent cooling in the housing market. It said: "Higher food, energy prices and council tax bills will also take up more of homeowners' income, reducing the amount many householders have to spend on housing."

The 1.4 million borrowers identified by the Council of Mortgage Lenders as due to come to the end of cheap fixed-rate deals are also cited as a factor by the Halifax study.

"The impact of higher interest rates will bite further in the coming months," it said. "In particular, this will arise as large numbers of borrowers who took out fixed-rate mortgages in 2005 and 2006 at very low rates move on to significantly higher rates as their mortgage term expires."

A minority of less creditworthy borrowers, already stretched, may find it very difficult to refinance their mortgages as the credit squeeze forces banks to tighten lending criteria, requiring, for example, larger deposits and lending lower multiples of income.

As a result, the bank warned the housing market is likely to be hit on two fronts next year even if, as is expected, the Bank of England pushes the base rate to below 5 per cent. The decline in the supply of mortgages available plus a fall in demand as buyers become less confident and find their income constrained will reduce house price inflation to zero.

Even so, the bank said: "Sound economic fundamentals will support house prices ... ongoing supply shortages will also underpin current valuations."