Are house prices rising or falling? Halifax has it both ways

Analysis: Inclusion of £1m-plus properties for first time sows confusion and causes problem for MPC
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The housing market continued to slow last month, posting the smallest rise in prices in December for four months, Halifax, the UK's largest mortgage lender, said yesterday.

The housing market continued to slow last month, posting the smallest rise in prices in December for four months, Halifax, the UK's largest mortgage lender, said yesterday.

The bank said the price of the average property rose 1 per cent in the month, following successive monthly rises of 4.4, 4.8 and 1.5 per cent in September, October and November.

The figures are broadly in line with those reported last week by Nationwide building society, which showed an easing in price growth to 1.7 from 1.9 per cent in November, taking annual inflation to 25.3 per cent.

But just when you thought you finally knew what was happening in the housing market, the Halifax has acknowledged it may have over-estimated the scale of the price rises in 2002.

Without any forewarning it included properties worth more than £1m – where prices have been falling in parts of the UK – and admitted it had added in too many expensive homes with garages in its monthly mix of properties. The net effect, it said, was to lop 3 percentage points off the annual inflation rate, producing an actual drop in prices in December of 2.1 per cent

To put this into context, yesterday's figures could either mean the housing market is slowing gradually – or has just suffered its worst shock since September 1992, when the UK crashed out of the European exchange rate mechanism.

"What on earth is going on?" Danny Gabay, UK economist at the investment bank JP Morgan, asked. "Are prices going up or down?"

More worryingly, analysts said the fact that the Halifax had not adjusted any of its historic figures, will make the figures very hard to interpret for some months.

David Hillier, chief UK economist at Barclays Capital, said: "That means the house price inflation rates that are published this year will be distorted – albeit by a diminishing amount – up to and including November 2003."

While it might appear a storm in a teacup, it is unfortunate it has happened at a time when the Bank of England has acknowledged that the state of the housing market is a key factor.

Halifax defended its decision, saying analysts had been "crying out" for the inclusion of £1m-plus homes while on the garage issue it had simply corrected an error as soon as it noticed it. "It does not change the underlying dynamic of the housing market," its chief economist, Martin Ellis, said.

The interest in how house price inflation is calculated – a technical and quite "anoraky" subject – has risen along with the proliferation of different measures. A few years ago only figures from Halifax and Nationwide building society were closely monitored. But now the Land Registry's quarterly figures are closely watched, the surveyors' trade body surveys its members and two homebuyers' websites – Rightmove and Hometrack – attempt to measure prices coming through estate agents' offices.

Soon the Government will join in with the launch of an "official" index produced by the Office of the Deputy Prime Minister, which is concerned that the existing sets of figures sometimes contradict each other by as much as 10 per cent.

Because of – or perhaps despite – the number of different surveys, the Bank's monetary policy committee will want to wait until it is convinced that a major turn in the market is under way before acting.

Yesterday, it decided to keep rates on hold for the 14th month in a row – perhaps an indication of the sanguine view it takes of the monthly house price data.

At the moment the Bank's central forecast is for prices to slow from the current level to close to zero over the next two years – a "soft landing" rather than a full-blooded crash.

That is also the most popular view in the City. Economists believe rising unemployment, inevitable hikes in interest rates and the impact on consumer confidence from the stock markets and speculation of war will act as a brake. But they point out that a shortage of properties for sale, a shift in demographics creating new households, and the historic low level of mortgage costs will support the market into 2003.

Figures yesterday showed the number of new homes built last year is unlikely to show a huge improvement on 2001's seven-decade low.

John Butler, a UK economist at HSBC, said that against that background it would require a major economic shock to deliver a property crash.

Halifax agrees, saying prices will rise 9 per cent this year. But it acknowledges the picture will look very different in the south and north of the country. It expects prices in London to grow just 2 per cent – less than inflation – as City job losses, lower bonuses and the adverse effects of falling share prices begin to bite. However, the Midlands and North will benefit from lower prices. Halifax said a reverse of the traditional North-South divide was under way. The region with the highest price rise last year was East Midlands, with 42 per cent, followed by the West Midlands, with 36 per cent, compared with less than 20 per cent in London.

Househunters still appear to be happy to buy into a benign scenario. More than four out of five believe there will be no crash in prices according to a poll published yesterday by the accountants KPMG.

But some experts believe house prices are simply so overvalued that a sharp fall in prices is inevitable. Capital Economics, the consultancy run by Roger Bootle, believes house prices will peak this year before tumbling 20 per cent, wiping out all the gains in housing wealth made since last spring. It believes prices will rise 20 per cent in 2003 but then fall 5, 10 and 7 per cent in the following three years.

Given the importance of the housing market it is no surprise that Capital Economics believes rates will fall to 3.5 per cent as the Bank attempts to offset the severe impact on consumer spending from a house price crash.

Mr Butler at HSBC believes rates will stay at 4 per cent this year. With little sign of a sharp economic slowdown, the Bank would not want to risk pushing the housing market to new unsustainable levels, he said.

So far the debate is following similar lines to a year ago when signs of faltering consumer confidence in the wake of the 11 September attacks prompted fears of an economic slump that turned out to be unfounded. Britain's 15 million owner-occupier households will hope the same is true this year.