Foundations laid for a housing recovery

Figures from the UK's mortgage lenders suggest the worst may be over. Richard Northedge reports

It's time to start practising chatting about house prices again, as figures showing UK property inflation heading quickly towards double digits will be announced this week. The remarkable recovery in property values will see the annual change in prices turn from an 18 per cent fall to a 10 per cent increase in less than a year.

Halifax, the country's biggest mortgage lender, calculates prices are currently 4.7 per cent lower than in October 2008 but it expects that to turn into a double-digit increase by next April. Rival Nationwide building society recorded a year-on-year increase of nearly 2 per cent last month after consistently recording annual decreases in house prices every month since March 2008. But figures from the society to be published on Tuesday will mark the start of a rapid rise in the rate over the next few months.

The duo will publish their house price indices this week, both forecasting a 10 per cent annual increase by February or sooner .

News of the housing inflation rate turning suddenly from a large negative figure to a positive increase that will rise steeply may give a further fillip to the property market ahead of the general election. However, estate agents and lenders are warning that the recovery could be followed by a new, short-term dip in prices.

The sharp change in direction of the property market means that while the latest slump was deeper than the fall in prices during the 1990s, it has been much shorter.

House prices fell for more than six years from 1989 to 1995 and took another 21 months to rise by 10 per cent. By contrast, the latest slump lasted just 19 months; according to Nationwide, the 10 per cent recovery should be achieved in less than a year.

However, while prices fell by only 13 per cent during the long 1990s slump, the market crashed by 23 per cent between the start of the credit crunch in July 2007 and last February, when prices bottomed.

As recently as April, the Halifax recorded the annual fall at 17.7 per cent, but low interest rates and a shortage of homes for sale have helped fuel a sharp upturn. Chartered surveyor Michael Day of Integra Property Services says: "This shortage of supply remains a key issue and has helped fuel the positive direction seen on house prices in recent months."

An increase in homes for sale is expected to ease the upward pressure on prices, though. Yolande Barnes, the head of research at Savills estate agency, forecasts prices could retreat again by up to 6.6 per cent by the middle of 2010. "We'll see a big bounce off the bottom by March next year but we think that by June the market will be showing small falls," she says.

The public remains conservative on the prospects for prices too, even though the market is rising. Although Nationwide's regular consumer confidence survey has shown a steady improvement in expectations for house prices over the past year, about 60 per cent or people still say prices will be unchanged in six months' time and the average forecast is for just a 1 per cent rise by next spring.

The building society's chief economist, Martin Gahbauer, says: "House price expectations can often be an important short-term driver of house prices and market activity because rising price expectations provide an incentive for potential buyers to bring forward their purchases. Indeed, the sharp drop in prices experienced in 2008 was preceded by a significant drop in consumer expectations for house price inflation."

But he admits that in recent months, actual house price inflation has moved ahead of consumer expectations, and he suggests that could signal a period when prices moderate. The rate of increase has already slowed since the summer: compared with price rises of 1.4 per cent a month then, October's increase was just 0.4 per cent and falls in some coming months are possible.

Even a small increase in the coming months, however, would now take the annual rate to 10 per cent.

Ms Barnes says the market has been driven by cash this year with buyers withdrawing savings and parents again contributing to children's purchases. "Low interest on deposits makes property look attractive," she says. "Cash-driven markets tend to bounce much more and the whole of the mainstream market has been more like the prime market, which is cash driven."

Nationwide believes interest rates will be unchanged throughout 2010 and Mr Gahbauer says: "As a result, mortgage affordability will remain relatively favourable both for new and existing borrowers."

But while politicians will be watching the housing market in the early months of next year to see if it provides a feelgood factor that could influence the general election, the campaign could itself damage a recovery, warn estate agents.

Mr Day says: "There are two major one-off factors that will impact on the market in 2010 – the general election and the World Cup. Both will see periods of slower activity as people get deflected from their normal activities.

"The Tories have said they will scrap home information packs – HIPs – if they are elected and this is likely to add to the usual pre-election market stagnation as potential sellers wait to see what happens before committing themselves."

Ms Barnes agrees. "It's not rational, but people tend to put things off with elections. They postpone their decisions, but the election could be the catalyst for things to change."

The fear of higher taxes and spending cuts affecting jobs in the public sector and at government contractors are factors that could influence buying decisions. But unemployment has risen more slowly than many expected and the Council for Mortgage Lenders this month reduced its forecast for the number of home repossessions from 75,000 to 48,000 during the year.

That contrasts sharply with the last housing slump. The fundamentals of the market were very different then, says Ms Barnes. "There was just not the cash around to drive the market or the rationing of mortgages. In the 1990s it took a long time to unravel. There was an extraordinary amount of household default; interest rates were high and people could not afford to pay the mortgage. This time it's about the availability of credit, not the cost of credit."

There are indications that mortgage availability has improved markedly, with lenders now advancing a greater proportion of property prices. The 42,000 home loans given last month were double the total in October 2008, according to figures calculated by the British Bankers' Association last week, just 6 per cent less than when the market started to weaken two years ago. And the average loan, at £142,000, is 11 per cent higher than a year earlier.

The ending of the relaxation of stamp duty rules next month is not expected to hit the market seriously, however. The Government temporarily lowered the tax threshold in September 2008 to exempt all properties priced below £175,000. The 12-month scheme was extended until the end of the year, after which the 1 per cent tax will again apply to homes costing above £125,000, with the higher-rate stamp duty continuing to be paid on properties above £250,000.

Falling house prices meant that although £175,000 was roughly the price of an average home when the concession was announced, most sales have been tax-free since then. The average property piece fell below £150,000 earlier this year, according to the Nationwide, and is still well below the temporary threshold.

The building society calculates the average price at £162,000 now, but Ms Barnes sees that heading back to almost £200,000 in five years, some 7.5 per cent higher than the peak of two years ago.

After next year's blip she forecasts modest price growth of 2.7 per cent next year but says: "The longer-term prognosis is for a return to price growth in mainstream markets, with the average UK house values expected to rise by 27 per cent over the period 2012 to 2015."

Expert Views

‘The general election and the World Cup will impact on the 2010 market’

Michael Day, Integra Property Service

‘Rising price expectations are an incentive to bring forward purchases’

Martin Gahbauer, Nationwide

‘We’ll see a big bounce by March but by June the market will show small falls’

Yolande Barnes, Savills