A new resident in Number 10? Don't panic

The general election may provoke an attack of the jitters in the housing market ... but ignore the politics and press on with the deal, advises Richard Phillips
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Labour or Conservative, all the pundits agree that, whoever wins the general election on 1 May, we will see an interest rate rise.

Interest rates have been raised after every one of the last seven elections, so there seems little reason that, in this instant, history will not repeat itself again.

A new Labour government will be anxious to persuade the markets of its commitment to fiscal rectitude on its return to power. Whether a rates rise is necessary for more fundamental economic reasons is less clear. At present, recovery is continuing steadily, unemployment is falling, while it looks as if the current Government will meet its inflation targets - much to everyone's surprise.

And the divide between Chancellor Kenneth Clarke, and Bank of England Governor Eddie George, seems to be narrowing. Either way, whether Conservative or Labour get in, it looks as if there is no need for anything more than some modest increases over the next year or so - unless Labour discovers a black hole in the public finances.

However, the fiscal outlook for whoever wins is much tougher.

Neither party has made any promises about tax reform which could effect home owners - although the Conservatives have promised for a long time that they will, eventually, abolish inheritance tax.

Likewise, Mortgage Interest Relief At Source (Miras) has been a favourite for abolition under the Tories for many years, although any sense of urgency has long since evaporated.

Should John Major return, the fiscal dilemmas, and the pressure to boost tax revenues, suggests Miras as a likely candidate for the axe.

Labour, as on many subjects, has refused to be drawn on Miras, although most commentators believe Gordon Brown, as Chancellor-in-waiting, has examined the possibility of abolishing Miras, to raise tax revenues.

First time buyers thinking of entering the market would do well to calculate the effect of this subsidy being removed from their budget. It is unlikely that any such change would apply retrospectively, in which case this is one incentive for you to start your house hunting now - rather than leave it until after the election, and the time of the next Budget, by late June or early July.

With Labour's commitment to moderate economic policies, it seems that the housing market will be otherwise left to its own devices for the foreseeable future.

An immediate half a point on interest rates, however, should send a message to the market that the early signs of overheating, especially in the South- east and central London, are unwelcome.

Most experts however, believe that so long as interest rate rises are gentle, rather than sharp upward hikes, house prices should broadly be unaffected.

Special factors account for the recent jumps. One is the huge bonus payouts in the City. Bonuses are awarded from before Christmas through to the New Year, and last year was a bumper one - several hundreds of millions of pounds, at the least. Many of the City bonuses are being sunk into housing. It is instructive that among retailers whose fortunes are linked to the housing market, it is the upmarket ones such as John Lewis, who are reporting surging sales in home furnishings and the like. MFI, the furniture retailer catering for the lower end of the market, by contrast, announced a flat set of results recently.

The South-east was one of the worst hit of any region by the slump of the early Nineties, where prices fell by 36.1 per cent, from their peak in 1989. Prices had reached a trough by the fourth quarter of 1992, and have since risen by 19.2 per cent. Even so, they remain a startling 23.6 per cent down from their highs - conclusive proof, it it were needed, that the problem of negative equity remains acute for many home owners.

Nationally, the problem is less severe - overall, prices have recovered 10.1 per cent from their low in early 1993, having fallen 12.1 per cent: not so acute, even if the recovery has a way to go before prices fully recover.

Unsurprisingly, the South-east still has some of the worst pockets of negative equity anywhere in the country.

The consequence is that where negative equity remains, many people are unwilling or unable to sell their homes, and climb up to the next rung of the housing ladder. In turn, that has left supply severely restricted - another contributory factor behind the rapid rise in prices seen recently.

The push-pull effect can also lead to quite serious pricing anomalies. Someone house hunting in North London recently came across two almost identical houses in the same street - with a pounds 100,000 price difference between the two.

Across the country, the evidence points towards a patchy recovery at best.

Dr Paul Sanderson, head of research for the Nationwide, says that as the collapse in the South-east saw a ripple effect spreading out from the epicentre to the regions in the early Nineties, a similar process is now under way, in reverse. The double ripple as he dubs it, means that the improvement around London will spread outwards, fanning house prices higher.

The top end of the market has seen a deeper, more sustained recovery in prices since the crash. Rupert Sweeting, an agent for country homes at Knight Frank, said: "Demand from the City and industry is now picking up, adding to existing strong overseas demand for top properties."

Despite this, the market is weaker at the moment than it would usually be at this time of the year. Mr Sweeting believes it is a reflection of pre-election concerns. Premiums on top-of-the-range properties are high, because "a lot of vendors seem wary about putting their houses on the market at the moment". He cannot recall a similar shortage of properties at the last election.

His advice on the election is ignore it: "You will probably get a better price now, than you might if you leave it until after the election." In the long run, his comments probably stand good for the market as a whole.