Will they? Won't they? House price changes are watched with greater anticipation than the mating habits of Giant Pandas. But many homebuyers are worrying unnecessarily. The property market is unlikely to burst or implode. Think less child's balloon or whoopee cushion and more slow puncture. Here are three reasons why:
Reason one: Interest rates
Plenty has been written about increases in interest rates. Never before has a bunch of suits in a confined space commanded as much fascination as the Monetary Policy Committee (MPC) of the Bank of England, which meets each month to set the base rate of interest. In the bleating which has followed recent increases, we forget too easily that we are living la dolce vita when it comes to interest rates. In the bad old days of 1990, we were paying an eye-watering 15.25%.
As a rule of thumb, the Bank of England raises interest rates to slow economic growth and keep a lid on inflation. But if rates are raised too high, then businesses and consumers will slow their spending as they have to meet higher debt repayments. This puts the brakes on economic growth, and in a worst-case scenario could even lead to recession. Economists don't want people to stop spending altogether but to save a little more and break the 'buy now, pay later' cycle. Financial markets believe UK rates will reach 5% by the end of year, while some analysts forecast they could even go a touch higher.
The wise men and women of the MPC carry a great weight of expectation as they aim to strike the fine balance between gradually letting the air out of over-inflated markets while keeping others buoyant. Unless they all go tonto and double interest rates in the next year then homeowners have a lot to be thankful for.
Reason two: Supply and demand
There is now a mountain of statistics to confirm that we are not all over-borrowing to buy houses we cannot afford. More and more people are staying put and using the equity in properties for home improvements. Others are renting until prices come down to more realistic levels, which in turn is benefitting the buy-to-let market. But prices are not the only thing discouraging buyers.
According to RICS (Royal Institution of Chartered Surveyors) in its latest survey of the housing market, the number of properties on surveyors' books is close to its lowest level for a year, and there are signs that buyers are getting discouraged. In December 2003, 41% more chartered surveyor estate agents reported a rise in house prices than a fall. They put the increase down to a lack of availability of property on the market.
'Many properties that sat on the market for months last year, have finally been sold as buyers had less choice available,' explains RICS housing spokesman and chartered surveyor, Ian Perry.
RICS believes the housing market bubble will not burst in 2004 and prices will continue to rise, although by only half as much as in 2003. It forecasts a 6% increase in house prices in 2004, based on the Government's new monthly house price index. This figure is half the 11% rise seen in 2003.
Reason three: Economic stability
Our property market is inextricably entwined with the bigger economic picture in the UK. Overall, we are in rude health. Over the last year, there was a drop in redundancies - the redundancy rate shows a fall of 0.5 to 5.9 per thousand employees which is one of the lowest figures on record. And Britain still has one of the lowest unemployment rates in the world at 4.8% compared with the United States (5.6%) France (9.4%) and Germany (9.8%). In addition to low inflation and historically low interest rates, house prices are on track for a soft landing.
'A repeat of the late eighties slump in prices looks unlikely,' says Alex Bannister, Nationwide's Group Economist. 'Whilst the economic fundamentals remain positive we would expect this to result in a slowdown in price growth as opposed to widespread falls. At the end of the 1980s cycle, house prices fell following a marked worsening in economic conditions. Interest rates rose sharply in response to rising inflation and many people lost their jobs as the economy headed in to recession. The current economic outlook remains positive and although rising rates are likely to act as a brake on the market, we do not foresee economic triggers arising that might cause widespread and sustained price falls,' he concludes.
Experts predict this position is not going to change a great deal in the near future. 'The prospects for the UK economy for the remainder of the year are bright,' comments Martin Ellis, Chief Economist at HBOS. 'We forecast that the UK economy will grow by 3.2% in 2004. This is ahead of the long-term average and faster than last year. Growth is expected to return to around 2.5% in 2005 as higher interest rates temper activity."
Compare 1000s of mortgages here
Not sure which is the best mortgage for you? Try this service
Mortgage Best Buys
Yahoo! Finance Mortgage Centre
More articles by Sarah Modlock
