Money Matters

Property Prophets

HOUSE prices will rise by anything from 2% to 9% in 2004, depending on which survey you read. Outlined below are some views from the 'experts' with some analysis.

MOST commentators expect prices to carry on rising in 2004, but at around 10% - slower than this year's boom of around 15% but still above the average of 7% to 8% that the UK has enjoyed for the past two decades.

The north of England is expected to lead the way, while the slowest growth is forecast for London – around 6% according to lender Nationwide.

The Lenders
Nationwide said prices would increase by 9% in 2003 – they rose by 15%. The building society predicts rises of 9% nationally and 6% in London. Group economist Alex Bannister said: 'The housing market will carry considerable momentum into early 2004 and we expect house price growth to be biased towards the first part of the year. Later in the year, rising mortgage rates and slow income growth will dampen confidence.'

Halifax, the UK's largest lender, said house prices would rise 7% in 2003. In the end its own research put the true figure at 15%. The bank believes next year will see growth of 8%, supported by the 'three pillars' of low interest rates, high employment and good affordability.

Abbey expects house prices in the UK to rise by a more modest 6% in 2004. Woolwich, owned by Barclays, is expecting 5% growth. Last year, it was coy on giving a precise figure. However, it did say interest rates – a key driver for house prices – would rise to 4.75%. The base rate* is currently 3.75%. The bank now expects a rise to 4.25% in 2004.

Estate agents and surveyors
Estate agents - not known for talking down the market - are among the most bearish of forecasters - the National Association of Estate Agents expects a rise of as little as 2% to 5%. Up market London-based agent FPD Savills predicts 4%.

The Royal Institute of Chartered Surveyors (RICS) says growth will be 6%. It predicted a rise of 'no more than 11%' in 2003. 'The question on everyone's lips is will the housing market crash next year. A lot depends on the continuing strength of the overall economy and low interest rates,' says Milan Khatri, chief economist at RICS.

Punters
Several spread betting* firms allow clients to have a flutter on whether house prices will rise or fall. Bullish punters at City Index expect a 7% rise in prices in England and Wales by July, although they are betting on prices to nudge up just 0.5% in London. Clients at IG Index expect no movement in London prices between now and September.

Think tanks, economists and pundits
Capital Economics, an industry consultancy, leads the doom-mongers. It has said the market will peak in the middle of 2004 before falling back towards the end of the year giving a 6% total rise over the year. Ed Stansfield, property economist at Capital Economics, says 2004 would be the start of a 20% decline over three years. It believes, however, that a boom will return in 2007.

The Centre for Economics and Business Research is expecting a sharp slowdown in London growth from 10.7% this year to 2.4% in 2004, 1.4% in 2005 and just 0.5% in 2006.

Summary
The overriding view is that rising interest rates will cool the property market although countrywide price falls are unlikely. Nationwide points out that if base rates rise from 3.75% to 4.75% in 2004, as the City predicts, repayments will remain affordable. Such a rise would see a typical homeowner’s repayments rise from 27% to 31% of average take-home pay. The figure soared to a painful 40% during the late Eighties property boom.

But the above views suggest many pundits believe the old rules no longer apply – a classic sign of a bubble according to the property pessimists – and that a one-off switch from high to low interest rates has given the market a unique boost in recent years. They say low rates make repayments cheaper and so therefore today's relatively higher house prices can be sustained.

Wrigleworth's 'Elvis' comment makes it appear he's putting his neck on the line. However, history suggests property crashes take longer than a year to germinate. The most infamous post-war decline – that of the late Eighties – was drawn out. Prices fell less than 9% in the first year from the market peak of an average £62,700 in autumn 1989, according to figures from Nationwide. But by the spring of 1993, values had fallen a total of 21% to barely more than £50,000.

And a look at Japan - another densely populated country where property bulls argued high demand would continue to push up prices – shows that declines can be long and painful. Prices there have been falling since 1990.

The pundits, along with most homeowners, will be keen not to see a repeat of either example in 2004 Britain.