Stalling housing recovery at risk from higher tax and interest rates

Higher Interest rates and a capital gains tax (CGT) hike could put the housing market's recovery at risk, a leading property analyst warned today, as it revealed further evidence that a recent pickup in the sector may be running out of steam.

Today, Assetz House Price Watch, which compiles the five major price surveys, will say that average prices in April rose 9.5 per cent on the year to £200,615, just 6.7 per cent off their October 2007 peak. However, Hamptons, the estate agency, said a sharp increase in supply will constrain prices for the rest of the year. It said new sale instructions rose by a third in April. And the Hometrack consultancy said the possibility of higher interest rates and CGT rates now represents the "greatest threat" to the market, where constrained mortgage lending is already acting as a brake on growth.

There has been continuing speculation that the Government will announce a sharp increase in the CGT rate in its emergency budget next month, which would affect property owners with second homes.

Hometrack said that while it was now too late for most people to sell property not already on the market, there is a good chance that any rise announced by the Chancellor in June might not take effect until April of next year. That could lead to a further sharp increase in supply as second homeowners rush to sell property before the higher tax rate is introduced.

At the same time, rising interest rates would damage demand for housing, Hometrack warned, with mortgage affordability adversely affected. The Organisation for Economic Co-operation and Development (OECD) said last week that with inflation running well above the Bank of England's target of 2 per cent, the Bank's Monetary Policy Committee would have to raise interest rates before the end of the year, much earlier than most housing market professionals currently expect. The OECD is also calling for a hike in the Bank's base rate from 0.5 per cent now to 3.5 per cent by the end of 2011.

Hometrack's warning on mortgage affordability is especially worrying because its latest snapshot of the housing market suggests there was a slowdown in May. While one-off factors may partly explain the setback, the market could be going into reverse.

"The May survey of 1,500 agents and surveyors across the country shows how uncertainty generated by the election has a clear impact on housing market activity, with fewer buyers coming to the market, a marked slowdown in sales agreed, and a drop-off in the number of new homes for sale," said Richard Donnell, director of research at Hometrack.

The volume of sales agreed in May was up by just 2 per cent, compared to growth averaging 9.6 per cent per month over the previous three months, Hometrack said. Demand for housing was also muted, with the number of new buyers registering an interest in the market up by only 0.5 per cent in May, compared to 4.2 per cent a month between February and April.

House prices rose by just 0.2 per cent last month, said Hometrack, which cited an annual growth rate of just 2 per cent. But the analyst says supply is still limited, despite Hamptons' finding. "Low turnover looks set to remain the dominant feature of the market," Mr Donnell said. "This is a trend that will sustain the scarcity of housing for sale and will support prices."

Hometrack's warning that the housing market is recovering only slowly is in line with lending data published last week by the Bank of England and the Council of Mortgage Lenders. Both revealed that lending barely increased in April, with advances to homebuyers still unusually subdued.