Apocalypse not now

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The Independent Online
THE FEARS for the housing market are starting to look overdone. Yes, people feel insecure about their jobs and reluctant to commit themselves to bigger mortgages. Yes, many are still in negative equity - their mortgages bigger than the value of their homes. Yes, there is worse to come as the Government plans to remove income support for homeowners who lose their jobs. Yes, house prices have fallen sharply in the past three months and the level of transactions is woefully low by 1980s standards.

But the housing Armageddon forecast by some pundits just isn't going to happen. The prediction that house prices will fall by as much as 30 per cent in real terms over the next two decades is far-fetched.

The next few months may continue to see weakness, but then prices will rise slowly. House prices are driven largely by real income growth, and since 1992 there has been precious little of that. Economic growth has manifested itself through exports and investment, not personal incomes, so it's not surprising prices have fallen. That will change over the next 18 months: most forecasts are for a 2-3 per cent rise in real income growth. The prospect of tax cuts is an added spur. And as we report on page 1, we may already have reached the peak of the interest rate cycle. Sentiment would markedly improve with base rates heading South.

The long-term picture is even more positive for prices, which are governed by simple supply and demand. The supply of housing is relatively fixed, with new homes strictly limited by land release and planning rules. Demand for bigger and better housing is infinite, and divorces and net migration are set to increase the number of households. The trend away from home ownership and towards renting is a red herring. If the rental demand is there, there will always be landlords prepared to buy property to satisfy it.

In investment cycles - and don't let anyone tell you that homeowners don't still see their houses as investments - it often is darkest before dawn. For all the gloom, now looks a pretty safe time to gear up and buy a house. I hope so. I'm doing just that.