UK home owners push the boat out

From £30,000 to £122,000 ? Clare Francis charts 20 years of rising house prices and asks the experts if the tide is now turning

ast your mind back 20 years: interest rates started 1983 at 10 per cent, rising to 11.25 per cent in the summer; unemployment was on the up; average earnings were around £9,000; and the average house price, according to the Halifax, was £29,993. Now, interest rates are at 4 per cent for the 14th consecutive month; unemployment is falling; earnings average £26,519 and the average house price stands at £121,742.

To mark the 20th anniversary of its House Price Index, the Halifax has produced a study of changes in the property market over the past two decades. Not surprisingly, Greater London and the South-east have been the most expensive parts of the UK for house buyers throughout that time, with prices in London having gone up by 456 per cent. The costliest town in Britain is Esher in Surrey, where the average price is £416,326, followed by Henley-on-Thames in Oxfordshire, where you'd pay an average of £388,105.

But you have to look outside the South-east for the town showing the greatest rise over the last 15 years (that's when the Halifax index started analysing price differences between towns instead of just regions). In Lymm, Cheshire, prices have soared by 301 per cent. The average property there now costs £244,893, up from £61,114.

At the other end of the scale, Corby in Northamptonshire has seen the least growth, with prices just 40 per cent higher. And the cheapest UK town is Abertillery in Gwent. Despite a 110.3 per cent rise since 1988, the average house still costs just £37,872.

Although prices are up across the board, the rise hasn't been constant. The boom and bust of the late 1980s and early 1990s was sparked by the announcement in the March 1988 Budget that double tax relief on mortgages would no longer be available to married couples from August that year. This led to a rush to buy, with nearly 2.15 million transactions taking place in 1988, nearly double the normal figure. Demand pushed property prices up but then rising unemployment and a sharp increase in interest rates, from 7.5 per cent in May 1988 to 14 per cent by May the following year, left a lot of people unable to meet their mortgage commitments. What's more, many were living in homes worth less than when they had bought them.

With property inflation averaging 26.4 per cent last year, according to the Halifax, some fear another crash in the near future. Rises on this scale can't continue and the latest housing market survey from the Royal Institute of Chartered Surveyors, published last Thursday, suggests the slowdown may have begun. But Ray Boulger, senior technical manager at mortgage broker Charcol, says: "Those predicting a crash are looking at what's happened in the past and not what's happening in the real world. The key drivers for the housing market have always been interest rates and unemployment, and these look set to remain low."

Martin Ellis, chief econo- mist at the Halifax, agrees that the current situation is very different to that in 1988. He points out that, despite the price rises, property is still affordable and should remain a good long-term investment. Low interest rates mean mortgage payments in relation to earnings are much as they were 20 years ago. So while prices may fall slightly in some areas – most probably at the top end of the market – there's no reason to expect a slump.

Although rising prices are generally good for home owners, a couple of factors are having a negative impact. In 1983 stamp duty of 1 per cent was levied on homes over £30,000, but with the average house costing less than that, a lot of people didn't have to pay the duty. The threshold was increased to £60,000 in 1993, and in 1997 the Government added two new levels so that those buying a property worth between £250,000 and £500,000 have to pay 3 per cent duty, and houses above £500,000 incur a 4 per cent charge.

"The jump from 1 to 3 per cent for properties at £250,000 is crippling," says Mark Harris, director at mortgage broker Savills Private Finance. "I don't know why they don't tier it [like income tax] so you pay 1 per cent on the value up to £250,000, then 3 per cent on anything between that and £500,000, and 4 per cent above that."

The other negative impact has been caused by inheritance tax (IHT), once seen as a tax for the rich, which now affects four times as many people as it did in 1997. The current nil-rate band is set at £250,000; estates worth more than that are liable for IHT at 40 per cent. With many homes having doubled in value over the last five years, a lot of people have been propelled into the IHT arena through the price of their property alone.

The threshold has gone up slightly – it was increased from £242,000 in last April's Budget – but Mr Boulger points out that this rise was only in line with the retail price index and nowhere near the level of house price inflation. "If that tax is to be anything like fair, the £250,000 limit needs to be hugely increased," he says.

However, with careful tax planning you can reduce your IHT liability significantly, and it may be possible to mitigate it completely. Not only is it essential to have a will, it's worth seeking tax advice to keep as much away from the Inland Revenue as possible.