House prices keep rising, but fears of a setback grow

Value of average UK home rose by 2.9 per cent last year

UK house prices rose by almost 3 per cent last year, official government statistics revealed yesterday, with the average home valued at just over £200,000 by the end of 2009. The Department of Communities and Local Government said house prices rose by 0.8 per cent during December, the eighth month of increases in a row, taking annual property market inflation to 2.9 per cent.

The Government's figure is lower than the 6 per cent or so that both Halifax Bank and Nationwide Building Society estimate for 2009's annual house price growth, though its data is collected in a slightly different way. Nevertheless, the DCLG data is the latest evidence that the housing market staged a major comeback last year.

The DCLG's figures reveal that house prices rose in England, Scotland and Wales last year, though prices slipped back by 6 per cent in Northern Ireland. London saw the biggest gain, with prices up 4.9 per cent over the year.

Recent surveys show these rises have continued into the new year, despite some scepticism about the sustainability of the housing market's recovery.

Simon Rubinsohn, of the Royal Institution of Chartered Surveyors, said he expected this to continue. "The latest figures from the Bank of England show the cost of mortgage finance to be easing," he said. "That, alongside some tentative signs that money is becoming a little more freely available, should help to continue to push prices higher for at least the next few months."

Howard Archer, chief UK economist at IHS Global Insight, said he also expected house prices to continue rising in the short-term, before slipping back later this year.

"House prices seem likely to rise further in the near term giving the ongoing shortage of properties," he said. "Even so, we suspect that a modest correction in house prices will occur at some point in 2010 and they will be essentially flat over the year as a whole, assuming that more properties do come on to the market, thereby moving the supply/demand balance away from vendors towards buyers."

Mr Archer also warned that the housing market was difficult to forecast. "The overall economic environment is still far from supportive for house prices while credit conditions remain pretty tight," he said. "However, if properties remain scarce for some considerable time to come, then house prices may well continue to rise – this will increase the risk, though, that an eventual correction in house prices will be appreciable."

Other economists are more cautious. Moody's, the ratings agency, this week warned the UK housing market could face a second credit crisis from 2011 onwards, because lenders are then due to begin repaying more than £300bn that they borrowed from the Government during the first crisis to keep mortgage markets going.

As repayments fall due, many lenders may be forced to restrict the funds they make available for new mortgage loans, Moody's warned, choking off the number of would-be house buyers able to afford purchasers and thus reducing demand. With supply likely to increase while house prices are rising, that could lead to very significant falls in house prices in 12 months' time.

Moody's anxiety is shared by the Council of Mortgage Lenders, which has suggested home loan providers be given longer to repay the Government.