The UK Housing Market

Prospects for next year

Increased confidence in the housing market looks set to boost prices in some areas of the country next year, but there is little chance of double-digit growth wherever you live, according to leading estate agents.

Figures from mortgage lender Alliance & Leicester show that the average house price has soared from £101,550 five years ago to £189,852 now – an 87% hike.

But market stagnation means prices across most of the UK have remained relatively flat in recent months.

Nationwide Building Society recorded a 1.3% rise in October, while Halifax 's monthly survey showed no growth at all.

There are indications that this will change in 2006, however, at least in some parts of the country.

Savills, an estate agent, believes that prime central London property – or homes in the capital worth £1 million plus – will experience the highest growth next year.

It is forecasting rises of 5% in this part of the market and expects less expensive properties in London and the south east to increase in value by 3%.

Knight Frank, another estate agent, is even more bullish. It expects prime London property prices to leap 7% next year and the value of the most expensive properties – those worth £3 million or more – to jump by 8% on average.

This is obviously good news for homeowners looking to sell in London , where it has been a buyer's market for the past year or so.

However, growth in London could spell gains in other regions in the longer term as price rises in the capital historically pave the way for similar movement elsewhere.

Other positives for homeowners include that, despite reporting 0% growth in October, the Halifax survey three-month annual rate of growth hit its highest level since May last month.

Fears of a property market crash have also receded, with most commentators predicting a soft landing at worst.

Potential buyers, on the other hand, can take comfort from the fact that, while some areas are forecast to enjoy higher price rises than they have for several years, the market is still likely to weaken in others.

For example, prices in Wales and the north of England , where property values have increased the most in recent years, may well fall back over the next 12 months.

The latest quarterly figures from the Land Registry indicate that recent house price inflation in Wales has left the rest of Britain standing. Average property values in Blaenau Gwent and Merthyr Tydfil rose 27.98% and 27.75% compared to the third quarter last year, while prices in the south west of England increased by just 0.54% over the same period.

But close to 30% growth is not sustainable in the longer term, and estate agents point to this as a sign that the market in some areas has become overheated.

Savills' prediction for the market as a whole is therefore that it will remain flat in 2006 as areas such as the north of England and Wales experience a correction that could mean prices fall by up to 5%.

This is not a consensus view, though. Economists at Halifax believe that regional price patterns will converge over the next 12 months.

One thing the commentators generally agree on is that confidence in the housing market is improving.

A recent survey by Propertyfinder, a website, revealed that 54% of househunters - rising to 61% in London and the south east - expect property prices to increase over the next 12 months.

This should help to create a more dynamic market as confident buyers feel more comfortable stretching themselves and are less likely to postpone putting in an offer in the hope that prices will dive.

Alliance & Leicester's research suggests that this has not proved a sensible strategy in recent years anyway, despite a depressed market in many areas of the country.

Of the one in five househunters who admit delaying buying because they expected prices to drop, almost three-quarters found that prices increased rather than fell while they were waiting for the right time to enter the market.

Estate agents' books illustrate that all-important first-time buyers – who stimulate movement further up the chain as well as on the lower rungs of the ladder – are already returning to the market in volumes not seen for many months.

Figures from the Inland Revenue show that the number of residential property transactions grew by 16% between the second and third quarters of this year.

And Bank of England statistics for September reveal that the number of mortgage approvals agreed to fund house purchases rose for the third successive month.

On an anecdotal level, the deluge of mailshots from estate agents' sales offices that has landed on my south London doorstep in recent weeks also indicates a heightened level of buyer activity.

Reasons for this renewed enthusiasm include better employment figures and the Bank of England's decision to cut the base rate – to which most mortgage interest rates are linked – to 4.5% in August.

Many economists believe the BoE could drop rates again next year, leading estate agents such as Knight Frank to predict that the recent flurry of activity will continue into 2006.

But while confidence in the market appears to be on the up, both buyers and sellers are realistic about the rises they expect to see over the next 12 months.

Respondents to the Propertyfinder survey felt prices would not increase by more than 0.5% over the next year and research from Alliance & Leicester shows that 78% of people still think that property in the UK is overpriced.

Other potential stumbling blocks for the market next year include concerns about the state of the economy and the continuing disparity between property prices and average earnings.

Nationwide and Halifax concur that these factors will be enough to prevent a widespread increase in demand markedly boosting the housing market.

Halifax 's analysis of its latest survey also suggests that the lack of movement in October illustrates that the market remains on track to stabilise, rather than shoot up again.

The Yahoo! House Price Centre is a free service from Yahoo! UK and Ireland that allows you to discover the price paid for residential property sold in England and Wales right back to april 2000, and in Scotland back to June 2003. This information is drawn from the publicly accessible Land Registries that record this information on behalf of the government.