House buy no sure bet: Personal Finance

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THE misery of the becalmed housing market has made all home owners wary of making a false move - so they make no move at all.

House prices tell one story about the temperature of the property market and the balance of supply and demand, but reports of price movements can give a false picture when they are based on very thin trading.

Just as sticking a thermometer in a glass of liquid changes the temperature, the monthly house-price reports from the Halifax and Nationwide building societies affect the direction of house prices as well as reporting what has been happening in the previous month.

Over the past year or so both have been reporting small monthly rises and small monthly falls with rises just about managing to outpace the falls. But the over-optimistic housing gurus have all been predicting better times around the corner - so sellers have been holding back for fear of parting with their homes ahead of a surge. For those who also plan to buy a new property this strategy is clearly flawed.

But the effect of the fear of a premature sale has left the market with potential buyers unable to find their dream home. Second-rate property, including repossessions, remains unsold, giving the market a dull feel, while the few good buys that come on to the market are snapped up at perky prices.

Barclays Bank started publishing its new index of mortgage activity last week. This monitors the cash flows through solicitors' accounts to give a picture of how much trading there is about. It shows a gently rising trend and predicts 1994 will show house purchases 7 per cent ahead of last year.

It is dangerous to jump to conclusions about the effect this is likely to have on house prices. Threatened interest rate rises provide a gloomy backdrop. But the longer the pause in activity lasts, the more vigorous the return to 'normal' activity is likely to be when greed and optimism drive out fear and pessimism.

Homes are clearly more affordable now than they have been for years, but they are now regarded as a risk purchase rather than the one- way bet that spawned all those cliches about bricks and mortar.

This brings all the dangers of turning that pent-up demand into a mad scramble, which forces up prices in a rush. And the further they rush ahead, the greater will be the risk of the return of falling prices.

NEGATIVE equity is a silent jailer that traps homeowners in their property when its value sinks below the size of the mortgage.

Many would be willing to pay quite a bit to avoid it happening to them in the future. So up popped a scheme that promised to take this risk out of homeownership.

The policy, which was almost launched last week, offered to pay the difference if a house was sold for less than it was originally valued at. Insurance to cover a drop of pounds 10,000 would cost pounds 25 a month for three years.

But the scheme promoted by KMK Financial Concept, a West Country credit broker, has fallen apart after the offshore insurance company underwriting it pulled out.

Azteca Insurances SA, administered from Dublin but registered in Montevideo, Uruguay, in March, was dismayed that the plan was met with scepticism from those who noticed that Azteca's status meant policyholders would not be covered by the Policyholders Protection Act in the event of Azteca's insolvency, and neither would they be able to complain to the Insurance Ombudsman if a dispute arose.

The whole thing did not stack up. British insurers that took on the liability for falling house prices when they insured the risk that mortgage lenders took when lending on a property discovered it is not like other insurance, where the good and bad cancel each other out. When one goes wrong, they both go.