This market is not for turning

House prices to bid the bad times goodbye? We've heard it all before, writes Nic Cicutti
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The Independent Online
ANYONE reading forecasts from the Halifax and Nationwide building societies last week of a 2 to 3 per cent rise in house prices during 1996 will have been struck by a sense of deja vu.

Both societies, after all, predicted 12 months ago that house prices would rise by a similar amount in 1995. As we now know, prices fell.

The housing market took a battering throughout 1995, with prices down a further 1 per cent year on year, and sales and confidence collapsing.

So how can lenders - and most other experts - now claim there will be a revival next year? Are they not trying simply to talk up the market for their own commercial ends?

To understand the reason for the latest claims, it is important to study what happened in 1995.

Towards the end of 1994, it had seemed as if a slight recovery from the steep decline of the early 1990s was finally in sight. Prices in 1994 did edge up slightly and the number of transactions remained steady in that year.

True, the "feelgood factor" had not yet returned and fears of redundancy continued to blight people's willingness to make big purchases such as homes. Yet the decline in the unemployment figures and a continuing economic revival encouraged many observers to believe the worst was over.

But then some other factors revealed themselves, upsetting the pundits' calculations.

Heading the queue was the knock-on effect of a progressive increase in bank base rates, from 5.75 per cent in September 1994 to 6.75 per cent in February this year. Mortgage lenders responded by raising the cost of home loans. Between October 1994 and January 1995, headline-grabbing interest rates rose from 7.64 per cent to 8.4 per cent, adding about pounds 25 a month to the cost of a pounds 50,000 mortgage.

Of equal significance was the way in which the money markets interpreted the upward move in rates. For at least the first half of 1995, expectations remainedof further base rate rises, triggering comparable increases in home loan rates.

The result was that fixed-rate mortgages, the increasingly popular way of borrowing in 1994, rose from the 6.5 per cent obtainable over five years to 9 or even 10 per cent at the start of 1995. Not surprisingly, the market for new loans slumped.

Meanwhile, the effect of Government measures was deepening the gloom. First were the tax rises announced by Chancellor Norman Lamont in 1993 but carried through by his successor, Kenneth Clarke, over the next two years. The net result was a drop in average take-home pay of about pounds 10 a week.

Then there was Mr Clarke's Budget in November 1994, which cut mortgage interest relief from 20 per cent to 15 per cent on the first pounds 30,000 of a home loan. This added about pounds 10 a month to the cost of mortgages over pounds 30,000.

Finally there was the announcement by Peter Lilley, Secretary of State for Social Security, that from October 1995 new borrowers would not be paid mortgage interest benefits for the first nine months after becoming unemployed. Existing borrowers would also face restrictions on benefits, albeit not quite so draconian, if they lost their jobs.

Despite a long and bitter campaign by mortgage lenders and organisations such as Shelter, Mr Lilley was unmoved.

Faced with the prospect of having to pay up to pounds 25 extra a month for an equivalent level of insurance cover on a pounds 50,000 loan, prospective borrowers simply stayed out of the market.

One welcome effect of Mr Lilley's cuts was that some lenders, desperate to prop up the market, introduced significantly cheaper insurance cover.

Initially, their move had little effect. The collapse in demand led to a slump in prices. In turn, the number of households with negative equity remained above 1.5 million. And millions more were barely above negative equity levels, ensuring that they too were hardly likely to consider future home purchases.

Given all this, is it not premature to expect a housing market recovery next year? No, say the experts, arguing that the very factors which dragged the market down in 1995 have now gone into reverse.

After the scare at the start of the year, mortgage interest rates fell three times in quick succession between September and December. The cost of a pounds 50,000 loan, at an average of 7.49 per cent, will shortly be pounds 40 a month cheaper than early last summer.

Predictions for next year are of another slight dip, after which rates are expected to remain stable for the foreseeable future.

November's Budget brought the return of tax boosts, with an average family gaining by up to pounds 20 a month. The Government's previous responses to looming elections suggest further cuts will be on the agenda for the next Budget.

Unemployment continues to fall, helping to ensure - it is argued - that fears over cuts in mortgage interest benefits are being laid to rest.

If all this sounds too good to be true, it may be because it is. Despite the experts' new-found optimism, none suggest there will be a house price boom next year. A 2 per cent rise is less than inflation, while longer- term forecasts of 5 per cent each in 1997 and 1998 are too far out to prove or disprove.

Significantly, there is mounting evidence that home owners have changed their attitudes. A survey by Legal & General found that 70 per cent of people buying a flat view it as a home, not an investment. More and more people are paying lump sums towards their mortgage to shorten the term of the loans. Perhaps, as lenders tell us how bright the outlook is for 1996, that is the attitude to take: forget the promises and just get the painful bit over and done with. Homes are for living in, not speculating with.